The Fall and Rise of Roger Lowenstein

Not my fault guvnor

To start off with the fall, it has to be admitted that on p 66 of my edition (ISBN 0375758259) he does allude to:

the familiar bell curve, with the most occurrences
around the average and a sharp drop-off at either extreme. This is
called the normal distribution or, in mathematical terms, the lognormal

Well, not exactly, and the illustration (above) repeats the confusion and confounds it by suggesting that the distribution terminates at +4.0 and -4.0, rather than extending to infinity in both directions.

However, there is an awful lot-written in 2000-that seems to predict exactly what has happened since, which is where we see Lowenstein rise (pp229-232):

Alan Greenspan freely admitted that by orchestrating a rescue of Long-Term, the Fed had encouraged future risk takers and perhaps increased the risk of a future disaster…

On balance, the Fed’s decision to get involved–though understandable given the panicky conditions of September 1998–regrettably squandered a choice opportunity to send the markets a needed dose of discipline…

Greenspan’s more serious and longer-running error has been to
consistently shrug off the need for regulation and better disclosure
with regard to derivative products…

…the system of disclosure that has worked so well with regard to traditional securities has not been able to do the job with respect to derivative contracts.  To put it plainly, investors have a pretty good idea about balance-sheet risks; they are completely befuddled with regard to derivative risks.

The Long-Term crisis happened to involve a hedge fund, but the fathers
of the crisis were the big Wall Street banks, which let their standards
grow lax as their pocketbooks grew flush. At the time of the
bailout, the banks were depicted as victims that had been kept in the
dark by Long-Term’s patented secrecy… Each bank had known its own exposure to Long-Term trade by trade; it did not take genius for them
to infer that the fund was doing similar business elsewhere.

And Lowenstein also states that the proximate  cause of it all going wrong was things that had been assumed to be independent actually turning out to be correlated–just like the mortgage defaults in our recent sub-prime-initiated downturn.

So we can safely conclude that giving gamblers a one-way bet, where if they win they win and if they lose they get their stake back, is not really a good idea…

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