Lessons Ignored

This is a nice article entitled "A Lesson the Markets Ignored".

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/22/AR2008092201922.html

The problem starts when young, computer-savy traders dazzle their superiors with investments too complicated to understand. If it is a single "rogue", like at Barings Bank or Societe Generale, the bank may founder.

But what happens when LOTS of traders start doing it?

Why did the upper echelon allow it? Because "Everything was going right. They were making lots of money, which they deserved -- in their wonderful circular reasoning -- because they were making it."

"The theme in the current financial crisis is not, as John McCain would have it, greed, since that, like lust, will be with us forever. Instead, it is transparency. Leeson (from the Baring's Bank failure), you may recall, was dealing from Singapore in exotic derivatives that his bosses in London little understood. All they knew was that Leeson was putting huge profits on the books, not that those books had anything to do with reality.

Somewhat the same thing happened on Wall Street. The complicated, exotic and downright erotic financial instruments cooked up at the investment houses were, in fact, little understood not only by the buyers but also by the sellers. You can see that from what they said and from what they did: Lehman Brothers, Bear Stearns, AIG and others all held on to financial instruments that were worth less than they once thought. This was truly a case of the blind leading the blind."

So much, as Warren Buffet would say, for "technical analysis", or, "I buy whatever goes up because surely it will go up more."

Originally posted by spruce112358
The complicated, exotic and downright erotic financial instruments cooked up at the investment houses were, in fact, little understood not only by the buyers but also by the sellers.