Wall Street's 'Colossal' Risk Management Failure

Financial heart attak

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IT experts say the current Wall Street crisis may be a financial heart attack that warns of more serious problems ahead for the industry. Risk management controls have faltered in grand fashion, according to a well-known RSA data security executive. Consumer-oriented IT companies may face problems selling newer, faster products that aren't absolutely necessary to have, such as updated iPods.

"We [at RSA] certainly play a role in mitigating this sort of thing, but there's business risk, and it's as if the regulatory authorities and businesses themselves have not recognized the speed at which business is done today," Coviello said. "The ability to do these complex financial instruments requires literally a Ph.D. in applied mathematics to understand some of these things that are being treated by 25- and 35-year-olds without the profile of risk behind it.

"So you've got speed conspiring with complexity to create more risk, and there's nobody evaluating the risk!"

There's nothing wrong with the breakneck speed at which business operates, because it does lead to greater productivity, Coviello said.

Look nice and very "capitalist" approach. What if this is the result of communist attack on oil market, cash have migrated to oil companies and if I remember well those companies have R & D departments where computers a tools and no intention to reinvest on capital market. And there is a discontinuity, between industrial engineers with money now and people playing on market.

Liquidity is an accounting parameter that prevent this heart attacks. There is somebody reading basis accounting lessons and leave "risk management theory" at his area of expertise?
It seems clear that no one really knows what is coming next. Why?

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory.

Really understanding what’s going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings.

....models of deregulated electricity markets are being developed by a handful of researchers around the world, who see them as the only way of reckoning intelligently with the design of extremely complex deregulated electricity markets, where faith in the reliability of equilibrium reasoning has already led to several disasters, in California, notoriously, and more recently in Texas.

If we’re really going to avoid crises, we’re going to need something more imaginative, starting with a more open-minded attitude to how science can help us understand how markets really work. Done properly, computer simulation represents a kind of “telescope for the mind,” multiplying human powers of analysis and insight just as a telescope does our powers of vision. With simulations, we can discover relationships that the unaided human mind, or even the human mind aided with the best mathematical analysis, would never grasp.

Better market models alone will not prevent crises, but they may give regulators better ways for assessing market dynamics, and more important, techniques for detecting early signs of trouble. Economic tradition, of all things, shouldn’t be allowed to inhibit economic progress.

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