A special report on financial risk
Blocking out the sirens’ song
Moneymen need saving from themselves
Feb 11th 2010 | From The Economist print edition
RISK antennae twitch after a crisis. Bankers, regulators and academics, shaken from their complacency, jostle to identify the next tempest. Right now gusts are blowing from several directions. Many countries’ fiscal positions are deteriorating fast after costly interventions to shore up financial systems and restore growth. There is talk of demanding collateral even on deals with formerly unimpeachable sovereign entities. Recent terrorist incidents have raised the spectre of external shocks.
Yet at least a fragile sort of optimism has surfaced, born of ultra-cheap money and relief at having avoided a depression. In some markets fresh bubbles may be forming. Stockmarkets have rebounded sharply. America’s, though still well off their peaks, are up to 50% overvalued on a historical basis. Banks are once again throwing money at hedge funds and private-equity firms (though with tougher margin requirements). Issuance of structured-loan funds, which a few months back looked dead, is booming. Investment banks’ profits, and bonus pools, are back near pre-crisis levels. International regulators have been issuing warnings to chief executives about a return of irrational exuberance. Banks have been ordered to run stress tests involving a sudden jump in interest rates, in preparation for central banks’ withdrawal of monetary adrenaline.
Many will already be doing this as they try to show that they have learnt their lessons. Like the best chess players, bankers insist that they are now concentrating as hard on avoiding mistakes as on winning. Those that sidestepped the worst mortgage-related landmines now top the industry’s new order. Blackrock’s Mr Fisher defines risk as “deviation from objective”, on the upside as well as the downside. If your models tell you that a security is safer than its returns imply, as with CDOs, that might just suggest hidden risks.
Fancy mathematics will continue to play a role, to be sure. But finance is not physics, and markets have an emotional side. In their struggle with the quants, those who would trust their gut instinct have gained ground.
Learning to tie knots
Governments are taking no chances. Bloomberg counts some 50 bills and other serious proposals for financial reform in America and Europe. Leaders in America’s Senate hope to pass new rules by March. But there are limits to what can be expected from regulators and supervisors. Like bankers, they have blind spots. As the mortgage fiasco showed, they are vulnerable to capture by those they police.
政府不想冒任何风险。 根据彭博社的统计， 欧美各国政府一共通过了50多个法案和其他重要的议案。美国参议院的领导人希望在3月前通过一些新的法案。.我们期望监管者能干的事毕竟还是有限度的。比如银行业，监管者们就有自己的盲区。像在抵押贷款危机中所体现出来的那样，监管者很容易被那些接受监管的人所俘虏。
Their job will be made easier if new rules tackle incentives for the private sector to take excessive risk. It is human behaviour, more than financial instruments, that needs changing, says Mr Mauboussin of Legg Mason. Like Odysseus passing the sirens, bankers need to be tied to a mast to stop them from giving in to temptation. Pay structures should be better aligned with the timescale of business strategies that run for a number of years and should not reward “leveraged beta”, unremarkable returns juiced with borrowed money. In securitisation, originators will have to disclose more information about loan pools and hold a slice of their products.
如果新的规矩能打消（tackle）私人部门过分承担风险的激励动因，那么他们（参议院）的工作也许会简单很多。就像美盛集团的马博新先生所说，需要改变的与其说是金融工具， 不如说是人的行为。像奥德赛经过塞壬海妖时所做的那样，银行家们需要被绑在桅杆上来避免他们屈从于诱惑。薪酬结构最好跟行之数年的企业战略的时段互相挂钩， 而不是拿来酬庸“杠杆贝塔”，酬庸那种用借来的钱灌水的原本稀疏平常的回报。在证券行业，发起人将必须披露关于贷款池的更多信息而且自身必须持有一定该产品。
Some of the worst abuses in securitisation stemmed from the use of credit ratings. Rating agencies systematically underestimated default risk on vast amounts of debt, resulting in puffed-up prices and a surfeit of issuance. Paid by issuers, they had every incentive to award inflated ratings and keep the market humming: average pay at the agencies rose and fell in tandem with the volume of asset-backed issuance (see chart 7).
An obvious way to deal with this would be to eliminate the agencies’ official “nationally recognised” status, opening the business to unfettered competition. Raters would then have to persuade investors of their competence, rather than relying on a government imprimatur. This, in turn, would force investors themselves to spend more time analysing loans. Oddly, proposed reforms fall far short of this, with no sign of anything tougher on the horizon. CreditSights, a research firm, awarded ratings firms its “Houdini was an Amateur” award for 2009.
Nor, alas, is there much appetite to tackle some of the public policies that contributed to the crisis. The non-recourse status of mortgages in large parts of America, for instance, gives the borrower a highly attractive put option: he can, in effect, sell the house to the lender at any time for the principal outstanding. An even bigger problem is the favourable tax treatment of debt relative to equity. Phasing this out would discourage the build-up of excessive leverage. But the idea has little political traction.
There are, to be sure, risks to rushing reform. Post-crisis regulation has a long history of unintended consequences, from the pay reforms of the early 1990s (when new limits on the deductibility from corporate tax of executive salaries merely shifted the excesses to bonuses) to key parts of the Sarbanes-Oxley act on corporate governance. Another danger is the pricing of risk by regulation, not markets. The credit-card act passed in America last year leaves providers with a choice between underpricing for some products, which is bad for them, or restricting their offerings, which is bad for consumers.
Most would agree, however, that markets need both tighter rules and better enforcement. The biggest question mark hangs over the fate of those institutions whose collapse would threaten the system. America’s proposal to cap banks’ size and ban proprietary trading has fortified those calling for radical measures to tackle the “too big to fail” problem.
The virtues of scepticism
By itself, though, the plan does little to back up Barack Obama’s promise to stop such firms from holding the taxpayer hostage. Proprietary trading and investments are a small part of most big banks’ activities and played only a minor role in the crisis. Nor does the plan cover brokers, insurers or industrial firms’ finance arms, all of which had to be bailed out. To persuade markets that the giants no longer enjoy implicit state guarantees, whether they are banks or not, policymakers will need to present a cocktail of solutions that also include tougher capital and liquidity standards, central clearing of derivatives and credible mechanisms to dismantle firms whose losses in a crisis would overwhelm even a strengthened safety buffer.
Together, intelligent regulatory reforms and a better understanding of the limitations of quantitative risk management can help to reduce the damage inflicted on the financial system when bubbles burst. But they will never eliminate bad lending or excessive exuberance. After every crisis bankers and investors tend to forget that it is their duty to be sceptical, not optimistic. In finance the gods will always find a way to strike back.