Soros on short-selling:

Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination.

That is what AIG, one of the most successful insurance companies in the world, failed to understand. Its business was selling insurance and, when it saw a seriously mispriced risk, it went to town insuring it, in the belief that diversifying risk reduces it. It expected to make a fortune in the long run but it was destroyed in short order.

My argument raises some interesting questions.

The game changer

John Lanchester, on Liaquat Ahamed’s new book, "Lords of Finance":

The crucial questions in history often turn out to involve things that people at the time simply did not understand. Sometimes these things were too complicated to be resolved, and sometimes they were so glaringly obvious that they were hidden in plain sight. Sometimes they were both at the same time: horribly complex, horribly obvious. In the buildup to the 1929 crash and the subsequent depression, the linked issues of reparations and the gold standard were at once unfixably complicated and so much at the heart of the system that they were hard to see plainly. The equivalent issue at the heart of the current financial meltdown is that of risk. For reasons to do with a lack of historical awareness, overconfidence, and faulty mathematical modelling, the entire global financial system was built on mistaken calculations about probability.

Heroes and Zeroes

“I don’t think it’s going to exist,” said Mark Sue, an analyst.

From the archive:

Just a few short months ago, it seemed that humanity stood on the edge of a communications revolution. Now a grim face replaces yesterday's optimism.

Optimism? Yesterday? Really? (No.)

Here's Andrew Odlyzko, from six years ago:

In any case, there is likely to be considerable turmoil in the telecom industry over the next few years.

Here's NYT, also from six years ago:

The telecommunications equipment industry is quietly pinning its hopes on a quick Iraqi war that would be followed by an American-led effort to rebuild the country after the ouster of Saddam Hussein.

How'd that work out for you?

A final thought, from 2004:

"Our business continues to be impacted by industry-related conditions."

Ha-Ha!

A Giant Falls

Nouriel Roubini:

The US has been living in a situation of excesses for too long. And when you have too many financial engineers and not as many computer engineers, you have a problem.

I think this country needs more people who are going to be entrepreneurs, more people in manufacturing, more people going into sectors that are going to lead to long-run economic growth. When the best minds of the country are all going to Wall Street, there is a distortion in the allocation of human capital to some activities that become excessive and eventually inefficient.

From the archive:

Things are going to be awful for everyday people.

Speak up:

When nonengineers think about engineering, it’s usually because something has gone wrong. In the follow-up investigations, it comes out that some of the engineers involved knew something was wrong. But too few spoke up or pushed back — and those who did were ignored.

If you see something, say something:

The difference between alchemy and science is if you tell people what you’ve learned.

Consider:

Georgia is about to become the first state to approve the use of the Bible as a textbook in public schools.

Finally:

Government policies -- from as early as the 1890s -- subsidized the spread of cities and fueled a chronic nationwide dependence on cars and roadbuilding, with little regard for expense, efficiency, ecological damage, or social equity.

Facetime with the Money Honey

Bosses complain that after a childhood of being coddled and praised, Net Geners demand far more frequent feedback and an over-precise set of objectives on the path to promotion (rather like the missions that must be completed in a video game). In a new report from PricewaterhouseCoopers, a consultancy, 61% of chief executives say they have trouble recruiting and integrating younger employees.

From the report:

What is new is younger people’s ability to mobilise into another job if their expectations and ideals are not met. To manage this difference, companies need to think creatively about reward strategies, using metrics and benchmarking to segment their workforce in a similar way to how many companies segment their customer base.

From the archive:

The spread of enterprise systems has resulted in a declining emphasis on creativity and ingenuity of workers, and the destruction of a sense of community in the workplace by the ceaseless reengineering of the way businesses operate. The concept of a career has become increasingly meaningless in a setting in which employees have neither skills of which they might be proud nor an audience of independently minded fellow workers that might recognize their value.

Also:

What we do for fun is just as educational in its way as what we study in the classroom.

Finally:

It's good to have a plan, but if something extraordinary comes your way, you should go for it.

I will, at all costs, avoid this generic procedure.

Managing the Facebookers

Marcia Angell:

After much unfavorable publicity, medical schools and professional organizations are beginning to talk about controlling conflicts of interest, but so far the response has been tepid. They consistently refer to "potential" conflicts of interest, as though that were different from the real thing, and about disclosing and "managing" them, not about prohibiting them. In short, there seems to be a desire to eliminate the smell of corruption, while keeping the money.

Have you seen Perfume?

From the archive:

The average Afghan spends one-fifth of his income on bribes.

The current method for disclosing conflicts of interest among medical researchers is an honor system in which researchers report their relationships with drug and medical-device makers, but nobody checks to make sure the information is accurate.

Drug Companies & Doctors: A Story of Corruption

Mark Steyn:

General Motors now has a market valuation about a third of Bed, Bath And Beyond.

From 2005, Rattle:

The valuation of porn must remain steady, or the new economy created by the Internet breaks down.

Have our shiny new SIVs broken down?

You won't buy our shitty cars.

So we'll be taking your money anyway.

Martin Wolf knows a steal when he sees one:

There are, nevertheless, formidable pressures for further falls in valuations, as leveraged players continue to be forced to offload assets at bargain prices.

Nassim Nicholas Taleb prefers to steer clear:

Many hedge fund managers ... are just picking up pennies in front of a steamroller. And sometimes the steamroller accelerates.

Rattle would like to be quite clear:

I think Decius and I should start practice claiming that MemeStreams is worth four billion while keeping a straight face.

For Paul McCulley, practice makes perfect -- but you must wait your turn:

When we all try to do it at the same time, we actually do less of it.

One step forward, and two steps back:

Valuation decisions are ubiquitous in human interaction and thought itself. Incorporating information valuation into a computational layer will be as significant a step forward as our current communication and information retrieval layers.

Can You Still See the USA in Your Chevrolet?

Common sense is not much use in a financial panic.

To be blunt, credit is successfully reestablished when financial elites say, "When." Credit is close to a synonym for the mood of the ruling class. To say an economy is based on credit is to say it is based on animal mysteries. Glamour, prestige, élan, sprezzatura, cutting a figure ... that is what the economy is made of. It is a rather terrifying thought.

See also:

Where are all the acorns?

Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much.

The Unwisdom of Crowds

Chris Anderson:

When I was at The Economist, there was a policy to rotate everyone every three years. The idea was that fresh eyes were more important than experience. "Foreign everywhere" was the mantra.

Each time, it changes my life and puts me back on a steep learning curve with a new subject to immerse in and a new pace of travel and speaking. I've got a new foreign land to explore.

Decius:

Noticing is easier in a foreign place because mundane things are unusual. It's the sameness of the familiar that closes minds.

From the archive:

What amazes Chipchase is not the standard stuff.

Richard Hamming:

I finally adopted what I called "Great Thoughts Time." When I went to lunch Friday noon, I would only discuss great thoughts after that.

Do something new every three years

How much do the wealthiest households earn in the US?

This interactive test will give you the opportunity to test your knowledge about the distribution of income in society and to learn more about it.

How did you do? Here's what it told me:

Good! Your score is 72.3 out of 100. Your pattern was kind of close to the actual one.

See also, from yesterday, Salary Increase By Major:

Suddenly, I am no longer unnerved by the emergence of grey hair.

Test your knowledge: Income distribution in the USA