Meditations On Bank Regulatory Hearings...

I found the banker regulatory meetings yesterday very interesting and almost metaphysical.

The Bankers are of the view that they cannot be said to have been wrong (looking back) given that the market priced the risk at the time within the then probability parameters even if (in the future) they (the Bankers) turned out to have mis-understood the risk. Put another way, how can Congress claim that the past assessment of risk was "wrong" simply because the low probability (yet possible) downside did in fact (we now know) materialize?

This is why Blankfein used hurricanes as a metaphor - if a giant hurricane only happens once every 100 years (on average) should you asses the risk based on the fact that it could just as likely happen next year as not? Over time what does "risk" really mean? How do you quantify probabilities given that in the future the outcome becomes known and is therefore "certain" (e.g. what in the past was in fact a 1 in 100 hundred chance did occur (i.e., it happened).

As I listened to the philosophical musings of Messers. Dimon, Blankfein, Mack and Moynahan I wondered; is our perception of risk somehow influencing the very nature of the risk in and of itself? Is risk a special category that because we can only perceive it through our own time limited, mathematical perception, by definition, misunderstood? Does risk really exist outside of our human perception as a special a priori category that if we could only dislodge its apperception from our senses we could see it in its pure (i.e., true, timeless and accurate) state (i.e., Pure Risk)?

I was thinking about the Congressional hearings at great length when I fell asleep and had a dream. When I awoke from that dream for one second I was not sure if I was dreaming or awake and could not distinguish between my waking state and my dream state. I wondered upon awaking more fully, how do I know that I am now awake sitting at my desk or rather that I am some other creature dreaming that it is me sitting at this desk and in the dream I simply think that I am me? At that moment I realized that my perception of "me" is limited at all times to my own self perception and therefore is of little help to me in determining the nature of things as they truly are but merely useful in determining things as I perceive them to be. As I thought through the implications of this I realized that no matter what my own self apperception (i.e., dreaming or awake) I must exist. For if I do not exist there could not be a "me" who is awake or a "me" who is dreaming.

The implications of this on our banking system were immediately apparent to me - for in applying this same principle to my Critique of Pure Risk I realized that Banco Capital Riego Ergo Inadequato, meaning: inadequate capital allocation requirements relative to risk was the main regulatory and industry failure which inadequacy was delusionaly thought to be OK by the very people in charge of determining capital adequacy requirements. Those delusions were egged on by compensation systems designed by the deluded to maximize pay off if the dream became real. This resulted in a nightmare.

In other words - "Banks take risk therefore they need way more capital than they/we think". This is the apriori nature of risk.