Kenneth Griffin, founder of Citadel Investment, bashes his hedge fund industry peers
- Thread starter makloda
- Start date
While I believe that there was predatory lending and greed galore in the credit-bubble that lead to the real estate bubble, blaming the derivatives and their trading goes too far.
The complication that was the CDOs and swaps, while they were understood more or less in isolation, grew into a system that became greater than the sum of its parts.
Systems have properties that are emergent, that are not intrinsically found within any of the component parts. They exist only at a higher level of description. For example, an engine isn't a feature of valves, pistons, or any set of parts in isolation, they have to be suitably inter-connected.
But it is not just the emergent properties that caused the problems. Imo the problem is that the "credit system" was not redundant enough. In the engine example, if the battery dies, you cannot start your car. There is no fail over to a good battery or some other power source.
The lessons for the future imo are:
1) Complex systems are emergent and you cannot understand them by looking at the parts.
2) You can damp problems by having redundant back up systems that failover when a part goes bad.
Number two above is attempted in our economics by having re-insurers for example. The problem is that not only are these systems complex, they have positive feedback, which means that if you are leveraging $1, the effect can be magnified 10x++.
In fact, it is amazing how well it works in all but the most extreme cases.
nitro
The complication that was the CDOs and swaps, while they were understood more or less in isolation, grew into a system that became greater than the sum of its parts.
Systems have properties that are emergent, that are not intrinsically found within any of the component parts. They exist only at a higher level of description. For example, an engine isn't a feature of valves, pistons, or any set of parts in isolation, they have to be suitably inter-connected.
But it is not just the emergent properties that caused the problems. Imo the problem is that the "credit system" was not redundant enough. In the engine example, if the battery dies, you cannot start your car. There is no fail over to a good battery or some other power source.
The lessons for the future imo are:
1) Complex systems are emergent and you cannot understand them by looking at the parts.
2) You can damp problems by having redundant back up systems that failover when a part goes bad.
Number two above is attempted in our economics by having re-insurers for example. The problem is that not only are these systems complex, they have positive feedback, which means that if you are leveraging $1, the effect can be magnified 10x++.
In fact, it is amazing how well it works in all but the most extreme cases.
nitro
Nitro -
You are correct that it is not appropriate to blame the derivatives themselves, the CMO is far superior to the REMIC structure. Same goes for securitization in general.
The major breakdown was in origination. The ability of banks to distribute the loans and focus on fees/volume corrupted them. There was no integrity on the part of the lender representative (loan underwriter).
Now on the risk management side, there is no excuse for the banks that are holding this stuff unhedged knowing what the contents are. If you blow up because your hedge counterparty can't make good that is a completely different game than blowing up just cause you suck.
Mozillo has to be sick knowing he's going to get the perp walk. He should be at least.
On Citadel/KG...don't put your money on failure. Citadel is a modernized GS without the garbage retail/equity research business.
You are correct that it is not appropriate to blame the derivatives themselves, the CMO is far superior to the REMIC structure. Same goes for securitization in general.
The major breakdown was in origination. The ability of banks to distribute the loans and focus on fees/volume corrupted them. There was no integrity on the part of the lender representative (loan underwriter).
Now on the risk management side, there is no excuse for the banks that are holding this stuff unhedged knowing what the contents are. If you blow up because your hedge counterparty can't make good that is a completely different game than blowing up just cause you suck.
Mozillo has to be sick knowing he's going to get the perp walk. He should be at least.
On Citadel/KG...don't put your money on failure. Citadel is a modernized GS without the garbage retail/equity research business.
Quote from nazzdack:
He may be finally "breaking out of his shell" and be more willing to deal with the news media. It could also mark a "top" in the success of him and his firm. We'll see.
Thanks.
"It could also mark a "top" in the success of him and his firm."
Aha, the old lame duck theory. Makes the most sense. The only time anyone wants to clean up the act is when they're on the way out or on the way to a new game.
I wonder how he did buying $800M of e-trade's subprime debt in November at 27c on the dollar? What was trading back then for 27c is now 8c ...
We have seen these whiz kids fall on their own sword sooner or later.
This guy can not fuckup like all the others?
The housing bubble was the fault of many. Mozilla is a slimball prick. The I-banks used old data to peddle new products with the outdated risk model.
Give enough time the financial industry implodes quite often.
Griffin is not any different than anyone else. Give him time.
This guy can not fuckup like all the others?
The housing bubble was the fault of many. Mozilla is a slimball prick. The I-banks used old data to peddle new products with the outdated risk model.
Give enough time the financial industry implodes quite often.
Griffin is not any different than anyone else. Give him time.