Archive for March, 2008

Guns Don’t Kill People

March 18, 2008 Comments off

Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”.
John Maynard Keynes

Is the Black-Scholes option pricing model responsible for the current credit crisis? The writer Michael Lewis (whose writing I generally admire) answers “yes” in “Inside Wall Street’s Black Hole” in the March 2008 issue of Portfolio magazine. He pins the blame on papers written 35 years ago by “academic scribblers.” He doesn’t blame Alan Greenspan, borrowers, lenders, ratings agencies; or investment banks. He blames professors. I don’t think this is one of Lewis’s finer efforts, but since he is highly regarded and widely read, it seems worthwhile to consider what he has to say. Read more…

Categories: derivatives

Gambling for Salvation: Why PBGC Should Just Say “No”

March 3, 2008 3 comments

The Pension Benefit Guaranty Corporation (PBGC) has just announced its intention to double its investment in equities to 45 percent of its $67 billion portfolio.  This decision flies in the face of responsible financial management, which in this case calls for avoiding equities entirely, or even better, taking a short position in the stock market.

PBGC’s decision to gamble for solvency is such a bad idea, and is motivated by such perverse institutional incentives, that I’d like to commemorate it by making it the topic of this first blog entry. Read more…

Categories: pensions