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12 Monkeys and More LEH


Matt Levine, Bloomberg, Regulators Ask Humans How to Deal With Robot Traders, here. Fast programming dudes(ettes), I think you have emotional intelligence, don’t listen to Levine about that. This is a wake-up call for Pink I though. That explains why Jason Blair has more followers the Pink I, our total audience is the 12 people Levine refers to below – the 12 Monkeys. No one else has the time to sort  through the engineering spec sheets. I hope google doesn’t figure this out. The Pink I page rank could plummet if this information gets around.

But a market dominated by computers looks a bit different. They’re so fast, and they’re all programmed by like the same 12 guys using the same mathematical models, and they have no emotional intelligence. So much more so than with humans, there’s an alarming chance they’ll all think and do the same thing.** If that thing is wrong, then it’s a big problem.

SEC Decides to Let Lehman Stay Dead, here. OK reasonable, then why bother with the London Whale indictments? Going forward folks are going to sytematically mark to mid of a displaced market when the P&L model on their correlation book blows up? Ish don’t think so.

You can disagree with the SEC’s decision not to go after Lehman’s gimmickry: For one thing, as my colleague Jonathan Weil points out, it’s not particularly well explained; for another, it couldn’t be that hard to convince a jury that Lehman was up to some naughty stuff. But I sort of like it. The way to prevent another Lehman is — well, lots of people will tell you that this week too, why should I get ahead of them? But it’s something like subjecting systemically important investment banks to banking-type regulation, or reforming short-term funding markets to reduce the risk of runs, or requiring banks to hold more capital and liquidity reserves, or making bank failures less disastrous through resolution planning or bank breakups. That is: It’s something systemic, and directed to the actual business risks of the investment banking model.

Focusing on those sort of systemic issues — as regulators have mostly done since 2008 — makes sense. Pretending that the 2008 financial crisis was about a series of idiosyncratic technical accounting decisions obscures that focus. The SEC could have tried to shoehorn Lehman into a story of obscure accounting fraud, and it chose not to just because that’s not the real story, and because the real story is more important. That seems like a good choice.


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