Rabbits and Risk Management

I am fascinated by the financial markets. Since I think that Chance in all its forms shapes our lives in ways we barely comprehend, the incredibly stupid risk management performed by financial types who should have known better is worthy of study as their folly threatens to destroy our well-being as a society.

How could men and women with sophisticated backgrounds in finance, business and mathematics not realize that the accumulation of trillions in notional values in Credit Default Swaps ["CDS"] and other highly-leveraged derivatives not create systemic risk should even a fraction of them be subject to events of default? Elementary principles of risk management, not to mention common sense, mandate that if the risk of something cataclysmic happening is small, then measures to protect against such risk are more than justified. Indeed, they are required.

Why, then, did the wizards of Wall Street rather than decrease CDS risk increase it beyond all reasonable levels? One is reminded of the rabbit who jumps out of the way of the speeding car at the last second, a rabbit who gives himself progressively less time each time before jumping until, of course, the inevitable happens and his life ends in an explosion of fur and blood.

The problem is greed, that old monster responsible for more pain and heartbrteak than any of the remaining Seven Deadly Sins. Unfortunately, if the financial rabbit's explosion were self-contained, only the stupidly greedy fools who engaged in this game of financial daredevilry would be crushed. This is not the case as it is obvious now that we, the prudent and thrifty, will pay for their sins. It is of course not fair but it is nevertheless an undeniable aspect of reality for which we need to prepare.

Let's hope it is not too late.

More on my ideas in this regard later.