Monday, March 23, 2009
Christopher Caldwell's column started predictably by attacking the 90 per cent tax on bonuses. But then he surprised me. He pointed out that the rage against the bonuses in the US was a middle class phenomenon and that it represents merely the most violent expression of an anger with executive compensation that has been growing for some years. He does not, therefore, simply go along with the banker backlash from the likes of Citi's Pandit the Bandit. They say punishing the bankers will drive them out and destroy the financial services sector. This rather overlooks the point that we'd all be a lot better off now if we'd driven out this generation of bankers some years ago. It's not too late to get on with this. Nobody implicated in the insanity of recent banking history is qualified to demand respect, trust or a part in the reconstruction. They destroyed much more wealth than they ever created. People are still not understanding this because the extent of the change involved has not sunk in. If they continue not to say it, then we shall have the worst of all possible outcomes - a restoration of the same old business model followed by a much more severe crash. This is why I am intrigued by Caldwell's reasoning. Even if only intellectually, it might be a green shoot of recovery.
In the same edition of the FT, I was also intrigued by this leader. It's not the risk maths that was wrong, it's the application. 'The standard risk measures used from the mid 1990's, know as value-at-risk or VAR, was criticised by mathematicians almost from the start for the way it drew inferences about forward-looking risk from past patterns of price movements.' The criticisms - of Taleb, Mandelbrot and others - were much more interesting and fundamental than that. But, hang on, were the criticisms of VAR widely reported? Because, it seems to me, they should have provided a series of FT splashes accompanied by a campaign against bad maths in the banks. This should have been followed by demands by depositors and investors for an independent investigation, government intervention, the banning of the use of VAR, a realistic re-assessment of risk and so on. But nothing happened. Strange that.
Posted by Bryan Appleyard at 8:24 am