March 13 (Reuters) – The 27-year-olds making the mistakes
change but the flaws in the incentives and risk models at the
heart of the global financial system remain basically unchanged.
Calling them ‘mistakes’ is charitable, as they are actually
systematic and predictable exploitation of loopholes by
employees without sufficient skin in the very risky game they
Here is the game, as it was played in 2008 and as it is
being played now: work for a financial firm, sell insurance
against an event the probability of which, while rare, is
underestimated by your firms’ models. Sit back, collect the
premiums, appear to be “beating the market”, and be paid
accordingly. If the rare event does happen, and it likely will
before your firm has been fully compensated, off you go with
your pay, leaving investors and regulators to clean up the mess.
If you think that model is all in the past, get a load of
what billionaire hedge fund manager Kyle Bass has been buying
from banks which ought to know better.
Bass, speaking at a forum last week at the University of
Chicago’s Booth School of Business, detailed how he has been
making large bets with banks, at very cheap prices, which will
only pay off if Japan’s creditworthiness disintegrates
disastrously within a year of when the wagers were made.