Revenge of the Jedi (Part II)

I wrote last week from memory about the use by the Basel II standard of a method, additively combining non-linear and correlated risk events

I see a post on the R-SIG-Fin mailing list from conference organizer Jeff Ryan, that the presentations from R/Finance 2009 are up

Page 4 on the PDF of the Klaus Rheinberger, et al. presentation nicely states the executive summary that this is 'problematic'. The work then shows a worked example

Let's call Basel II what it is -- a top down pronouncement on meaningless rules, written in a fashion that is willfully ignorant of the lessons from the US S & L 'hot money' and actuarially un-sound deposit insurance debacle 20 years ago, of LTCM as to correlated risks and 'being the market', and of the recent Credit Default Swap insurance blowup of AIG

"Back, to the Future"

Doc: "You see, Marty, this time I really, really know what I am doing, so you can trust me on this one"
Marty: "Gee, I dunno, Doc"

Fannie Mae Eases Credit To Aid Mortgage Lending - 30th September 1999 (New York Times)

... In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Yeah ... but THAT will never happen again. That 'S and L bailout' thing was a once in a lifetime event. Six Sigma, and all that. We're smarter than that now. It's different this time.

Sledding down the slippery slope

Mr Dooley reads the paper:

08:52 Facing shortfall, Massachusetts inquires about a Federal loan - NY Times

NY Times reports the Massachusetts state treasurer has asked the federal government about lending the state money under the same favorable terms given to banks and investment firms during the financial crisis ...

Call me old fashioned, but wasn't this result perfectly predictable [to the Fed, to Treasury, and to the Joint Economic Committee], once starting down the 'moral hazard' path?

It is too early for strong drink, but ...