Comments to Caveat on investment : model risk creates liability towards extreme

By Chitro Majumdar on May 29, 2012 8:12 AM http://blog.lff.lu/caveat-on-investments-model-risk-creates-liability-towards-extreme  on Luxemborough for Finance

Comment by : Edmond F. La’lang (economic and environment observer)

JP Morgan’s current credit derivative loss can be possibly interpreted as of the tip of another iceberg! Greek exit fears is already hitting all the markets, Indian Rupees are one of the lowest valued currencies in the world in respect to the dollar. It’s inevitable that currency volatility today touches a highest worry in India (Oil price goes up 10% last night), India’s Central Bank took Steps to encourage inflows and curb any speculation. Spain and Italy bonds surge and bank shares suffer and in this global persistence turmoil Dimon shakes up JP Morgan risk appetites. It’s not a great day for risk managers, because if things went as I imagine, this was possibly a decent strategy that has been killed by a risk manager that did not understand the model and went to Dimon screaming around like a headless chicken. I must tell that the problem is possibly not even with their model(s), but with the leverage employed in the strategy (LTCM has NOT taught anything?).

 Edmond : In my opinion, this is indeed a constraint on any calculation of econometrics and financial engineering that relies heavily on mathematical formulas and statistics are actually unable to be carefully and accurately calculate the various dynamics of the real business of economic conditions and financial fund. So it should always be revised, unfortunately also if not revised even calibrated to chance the risk will happen in the future and continue to perform leveraging even higher to cover the losses that have occurred. This is very strange because it would increase the burden of risk has gone before. My blog has stated and predicted that all risk management with mathematical risk models will still always be wrong and harmful because it was inaccurate and wrong in predicting the strains on biorhythmic and biocycle fluctuations in a linear growth condition and prosperity. It will always have up and down of volatility and turbulencies on dynamics economic conditions and the economic downturn. Read my blog:

http://bioeconomicnatural.blogspot.com/2012/03/bioeconomic-natural-as-new-alternative.html  ;  http://bioeconomicnatural.blogspot.com/2012/03/goodbye-homo-economicus.html  ;  http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/why-lehman-brothers-is-not-realized.html  ;  http://bioeconomicnatural.blogspot.com/2012/03/why-economy-can-not-being-able-to-good.html 

          Today portion arsing proportion of the institutional investors are no-longer going to trust banks in risk measures and reliability of their models.  So investors might finally become keener in coordinating with regulators and follow their risk management policies.

Edmond comment : actual measurement of the current risk is based on a mathematical calculation of risk with unrealistic assumptions in reducing the risks by stages. In my opinion, this would further increase the risk rather than reduce the risk, like building a tower in an earthquake prone area and very unstable. Risk management is do not put so much in a mathematical calculation but add some psychological and biological aspects in calculations and formulas to find what happen the real econo-business dynamic in the future ((read:

http://bioeconomicnatural.blogspot.com/2012/03/assumptions-dan-mathematic-linier.html  ; http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/implications-of-financial-tsunami.html  and http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/comment-to-complaint-alan-greenspan.html  ;  http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/implications-of-financial-tsunami.html
 

Various aspects of psychological, biological and natural force that always affects human activities and expectations. Thus investors should not rely on a variety of analyzes and predictions are made ​​based on a mathematical calculation of risk management. It is also experienced by the former governor of the Fed, Alan Greenspan saying that "We will never find a perfect model for analyzing risk. We'll never be able to anticipate the discontinuity in the market finansil" ( http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/comment-to-complaint-alan-greenspan.html).

Now regulatory bodies will try again (beyond Basel III) to be heard with the minimum capital requirements.

Edmond comment : this is also a less favored by George Soros, Warren Buffet and Paul Ormerod against all predictions and the direction of Wall Street investment see my blog : http://bioeconomicnatural.blogspot.com/2012/03/some-theory-of-predictions-that-not.html .

 Regulators so far try to guide markets with the minimum capital models however they haven’t enough ability to calculate on the effect of the various “hedging” strategies in their economic capital models or bankruptcy protection risk mitigation methodologies. Even if some regulators try to plug-in some good suggestions, banks couldn’t find enough expertise to implement or match with their instruments, or worse, resisted, knowing too well that risk control means less bonus money So banks will rather walk on the “extreme narrow risky trail” of existence (example: German bank pay cap is scrapped).

Edmond comment : read this blog to know how the real risk can affect financial market risk in economic dynamic by biocycle dynamic which based on natural power that not know by many economist and financial analyst  http://bioeconomicnatural.blogspot.com/2012/03/opportunity-and-risk-in-business.html  ;  http://bioeconomicnatural.blogspot.com/2012/03/uncertainty-and-threat-for-business.html and  http://fore-analysis.blogspot.com/2012/03/risk-management-method-of-trading-and.html especially for investment risk management on below blog).

Another big problem today is the correct methodologies for valuation of assets and liabilities. For insurance companies the valuation of the liabilities is one of the difficult issues. For the assets one could use the principle “mark to market” (unless he holds skeletons in the cupboards…then “hold to maturity” or “mark to fantasy” prevails  as the liabilities and also a big portion of the assets are not market traded.. Again one can mimic the fair valuation of the market traded assets and transfer the principle to the non-market traded assets and to the liabilities. The mark to market causes extra volatility because of overreaction of the markets (increased delta). Overreaction can cause bankruptcy without real reason. I refer here to the Russian crisis period (1998) where the bonds of the European countries (especially the Italian ones) got a big depreciation. The reason was that it was believed (maybe wishfully believed) that the Italian Lira would drop out of the pre-Euro agreement. The convergence of the interest rates would thereby stop

Edmond Comment : read http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/zero-interest-rate-effect-on-potential.html ). This was clearly an overreaction induced by speculation and without looking at the economic and political reality (http://fore-analysis.blogspot.com/2012/03/aspect-of-psychological-mass-on.html). At that time “Long Term Capital Management” had to be rescued. Maybe the rescuers did a good deal. In a recent crisis, the Swiss government bought bad parts of the UBS-portfolio, helping UBS to overcome its capital needs. These assets were so lowly priced that there was a discrepancy between the liabilities and the assets. UBS was almost bankrupt. Today the markets have positively reacted and as a result the Swiss Government made money on these assets! In a discussion with a banker, we were told that the mark to market causes volatility that could come from pure speculation and this influences the equity in a leveraged way (read my blog http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/why-lehman-brothers-is-not-realized.html on leveraging to get more gain with minimized the risk on financial engineering).

We heard that also on the liability side, some accountants advocate that one could use a valuation that puts in the default probability. But these suggestions sounds also a bit biased by conflicts of interests…the banker’s ones particularly.

In plain English it would mean that a company could get a huge benefit and hence a good bonus simply because it is downgraded. This is almost criminal activity. We learnt that the mark to market practice is now criticised by some accountants and specialists. We wonder what are the real motivations behind these criticisms.

Finally, we all know that when you cooking with junk ingredients it is difficult to get a good meal. It can look nice but if the ingredients were rotten, one should not eat it (Edmond comment : according to me that or the term "Garbage In Garbage Out" is if the data is garbage then the result will be garbage), it will be difficult to get a healthy and delicious cuisine. It can look good (the wrapper is very beautiful with a variety of fancy, so in addition to giving effect also amazed at the same time confusing the layman). The same for CDO. The rating agencies failed when they gave  AAA ratings to junk. And this practice triggered extra risk taking since one could get rid of the bad things from his own books by securitising them and selling them.. The regulators also failed but maybe they had an excuse because they were asked to believe the ”mark to model” fantasies…and failed to scrutinise them closely..
Let me close this with the following – if the practice of using risk measures goes on, we never can get rid with the crisis or recession followed by double and triple dip. And accordingly possibly all institutional investors would face insecurity with their investments and unforeseen surprise of the return as well.

Edmond comment : stranger indeed bigger bank owners grew bolder, as before Indonesia economic crisis of 1997/1998. Besides the bailout fund and also unwilling to pay its debts because it was unable to return the debt and mortgage due to third party fund given to its affiliates without consideration of the feasibility and credit risk. It also occurs in develop countries are the US, Europe and Japan who are experiencing debt crisis and recession induced bank, especially in investment banking business junk bond derivatives that received a huge bailout but many small and middle banks are liquidated (400 banks in U.S. since 2009). So should we look at what actually happened in the U.S., Europe and in Asia (Indonesia) at the time before the 1997 crisis is still ongoing. Actually Governor Ben Bernanke is afraid of the effects of deflation by lowering FFRT to 0.25%, but really he will dig a hole of Deflatoir and pressing real sectors. With this zero rate can be trigger on speculations by Carry Trade actions to enter the financial market (this is make financial market rally and commodity price being booster to make high inflation in consumption but make a real deflatoir condition on real sector by highest price on raw material to make a effientcies products and absorp the high unemployment rate. So that he is always keeping the Quantitative Easing (QE 1-2) and later followed QE3 and the banks who are not helping the real sector and SMEs. Yes obviously banking sector will go into speculative and consumptive but not encourage and strengthening the real sector with a result of fragile growth economy, unemployment remains high, purchasing power is low and property prices continue to fall. A recipe with this aspirin is less potent in the longterm, but just only a model of viagra or ecstasy that will make the body economy the U.S., Europe and Japan more a little strong in shorterm on how to cure the crisis and recession with recipes using only fiscal stimuli and monetary policy on zero rate, quantitative easing by printing money amd increased lending but no good effect. And finally in longterm that make more weak with much more deseases in economic body to be more fragile and weak to be recession (Double and Tripple Dip Recession) and tend to be more falling in long Deflation period.

This model does give rise to short-term high inflation, but in the long run it to created deflatoir effects feared by the Central Bank (http://bioeco-ronmentblogspotcom.blogspot.com/2012/03/zero-interest-rate-effect-on-potential.html). This will make the economy more vulnerable to diseases of the body in the long run, economic growth remained low in the unemployment rate remains high and purchasing power remains low in consumption and real estate, and finally into the abyss of an acute deflation in the Great Depression deflatoir.

Also read my blog :
1. Utilization of Econobusiness Biocycle Dynamic or Bio-Economic Natural on Corporate Business Planning in order to prevent a variety of business risk and market fluctuation with to know how this strains  http://bioeconomicnatural.blogspot.com/2012/03/utilization-of-econobusiness-biocycle_22.html  

2. How to get a good prediction with Natural Law Driven  http://bioeconomicnatural.blogspot.com/2012/03/econobusiness-biocycle-dynamic-forecast.html

Foot note :

         Fluctuations in short-term (daily and weekly) will occur naturally influenced by state of mentality, passion, taste, motivation of global mass psychology to take trading positions in a market that is crowded and often chaotic. If there is data or news that very fundamental economic conditions, business and politics, fluctuations in stock price movements will occur dynamically and both meteoric and volatile free fall in excess of the daily forecast. But in the medium and long-term investment will be influenced dynamically by biocycle and biorhytmic of legal and natural forces are always moving up and down dynamically. So you not only have to Globalization with Globalnet (internet system) but also now should have a vision in a way Galaxization with Galaxinet * * (Astronomical).

          Where we can know the strains and the condition of the Universe Kingdom in the short term (10 years), medium term of 50 years and long term 100-200 years), which will also be evident in a "Certainty of Life rather than Uncertainty Life " who always complained of many parties, including the leaders of the state policy makers, leaders of business policy (industrialists and traders) as well as experts in various fields of life. The power and influence of Natural, Galaxy and Universe Law (Universe Kingdom / Source One in Central Sun Universe) this will always affect every aspect of our lives on this planet, either consciously or unconsciously to anticipate properly.

        

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