Derivative Caution: Greedy Guts Not Alone

In my Greedy Guts Itself series of articles here I have been arguing that today’s quant driven derivative instruments (poorly understood and very hard to measure) plus the automatic computer-driven trading systems are one of the major factors (but not the only ones) driving the current sub-prime fiasco and the general malaise in the financial players and markets. Today’s Report on Business(February 2nd 2008) in the Toronto Globe and Mail has an article by Brian Milner who advances the notion that Bankers love Darwinian finance – until they’re faced with extinction.

This article cites one of the best of Financial Quants, Satyajit Das who has argued that there are explicit dangers posed by the proliferation of hard to measure and poorly understood derivatives and other complex financial instruments in World financial markets. Even worse this poor understanding is being done in hugely leveraged investment bank, hedge and private equity fund dominated M+A markets with those executive’s driven more by huge $billions personal fortunes to be gained than by their own understanding and mastery of the incumbent risks asociated with the instuments they or their direct lenders deal with.

Brian goes onto to describe how Das assessed the Societe General $7B fraud fiasco and the financial executives reaction to it. Brian quotes Das tellingly “We are basically relying on Darwinian Finance in the markets to sort it out. Except the moment things go wrong the Darwinian financiers run to mother and hide behind the [Central Banks]apron”. The remainder of the article sustains most of the views I have been advancing in the series on Greedy Guts Itself Here. In fact I dare say that Brian and Das go well beyond my own musings.

Brian, anytime you want to enjoy a fifth of your favorite, I am game.

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