Comments on: The risks of consolidation A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: ajay Wed, 06 May 2009 09:07:55 +0000 Will: I don’t think the players in other industries are as mutually interdependent as they are in finance. If Pratt & Whitney folded tomorrow for idiosyncratic reasons, I think the reaction from GEAE and Rolls-Royce would be more along the lines of “yippee” rather than “we are now surely doomed”.

dsquared makes a good point about correlation, but I think has misunderstood NNT’s point. Banks get into trouble for idiosyncratic or systemic reasons. By definition, a systemic cause will affect the entire industry, whether it’s concentrated or not. But an idiosyncratic event will only affect the entire industry if it affects a single very large bank that is tightly linked to the rest of the industry.

By: Will Ortel Wed, 06 May 2009 03:24:41 +0000 Perhaps we should expand this discussion to industries besides the financial industry; after all, Taleb isn’t arguing in his paper that just the financial industry needs to be smaller…he argues against any large institution, so not just Citi or Socgen need to be smaller, but also GE.

The problem isn’t simply “large things are bad”, it’s also “complex things become inscrutable when they’re big”.

After all…how can anyone know what’s really happening at any division of a major corporation, be that division AIG Financial Products or GE’s DIP financing arm.

By: bdbd Tue, 05 May 2009 22:09:27 +0000 A fellow named Taleb once scolded
that banks should be easily folded.
Once too big to fail
They cast too fat a tail,
And served not the world, but controlled it.

By: Ray Lopez Tue, 05 May 2009 19:26:47 +0000 Talib made a series of favorable trades in the early 1990s, wrote a book that describes Mandelbrot-Levy curves in layman’s language, and now represents he’s an authority on risk. Talib is trying to sell his book IMO.

By: Don the libertarian Democrat Tue, 05 May 2009 19:00:21 +0000 There’s a good post on this at The Economics Of Contempt: 2009/05/too-big-to-fail-experts-on-make- them.html

He mentions the following post:

“Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment Gary H. Stern President Federal Reserve Bank of Minneapolis Ron Feldman Senior Vice President Supervision, Regulation and Credit Federal Reserve Bank of Minneapolis”

It’s a good and sensible post. Here’s one quote:

“On the first point, we anticipate that policymakers would face tremendous pressure to allow firms to grow large again after their initial breakup. The pressure might come because of the limited ability to resolve relatively large financial institution failures without selling their assets to other relatively large financial firms and thereby enlarging the latter. We would also anticipate firms’ stakeholders, who could gain from bailouts due to TBTF status, putting substantial pressure on government toward reconstitution. These stakeholders will likely point to the economic benefits of larger size, and those arguments have some heft. Current academic research finds potential scale benefits in all bank size groups, including the very largest.3 (Indeed, policymakers will have to consider the loss of scale benefits when they determine the net benefits of breaking up firms in the first place.)”

This makes sense to me, and even applies to the idea of taxing the size of banks, which I prefer. I prefer Narrow/Limiting Banking precisely because it’s harder to change politically. No doubt, there will be movements to change it. But we need a simple plan with simple rules. We’ve proven that we can’t handle complexity or lobbying or regulating very well.

An, yes, I bring this up just so that this plan will be considered. By the results so far, I’m not really the best person to advance this plan.

By: caveat bettor Tue, 05 May 2009 18:04:54 +0000 In the same way, are you and Taleb advocates for states rights? After all, locating more authority in the federal government only concentrates risk, making the USA too-big-to-fail. And when California asks the other 49 states for a bailout, it must really keep Nassim up at night …

By: dsquared Tue, 05 May 2009 17:52:00 +0000 In fact, thinking about it, what were the “losses inflicted on investors” like caused by the disorderly unwinding of Nick Leeson’s positions? “Fewer SocGens, More Barings” doesn’t really sound like a very attractive solution to me.

By: dsquared Tue, 05 May 2009 17:46:46 +0000 [ all shareholders globally, who saw the value of their holdings marked down by trillions of dollars thanks to the effects of SocGen’s enormous and chaotic forced unwind.]

One doesn’t have to be Eugene Fama to think that there’s something screwy about attributing permanent losses to an event that by definition only took place because of short-term technical trading conditions.

Also, for NNT, of all people, to assume that the shocks which affect the ten smaller banks will be uncorrelated … words literally fail me! Why assume this? Why not assume that the conditional probability p given a failure at one of these banks is close to 1? Surely the S&Ls crisis (or the Spanish banking crisis of the 80s) shows us that you can have very big crises without very big institutions.