banking on a myth

risk. that's the measure. that's the key. how risky is something? if i make this bet, what are the chances of x,y,z happening? they have models for these things. but as i've said before, the outcome of a model is not always based in reality. the outcome could very well be logical, but practical, no. these models were behind the fall of long-term capital and they've been the reason so many people were surprised when their CDOs started falling. people actually think they can quantify risk. it's impossible. risk can be measured given all known inputs, but therein lies the fallacy, you cannot possibly include all unknown inputs. they're unknown! it's not impossible. so risk can be squeezed down to make you sleep better at night, but it's still there because you didn't factor in what would happen when these CDOs failed on top of all the credit default swaps that were lingering with them. i'm going off on this tangent because of this article. read it here. it's great.

so what is a credit default swap? real quick: let's say you want to bet on the yankees to win the world series but you're not sure they're going to win. so you bet five on the yankees and four on the astros. so i've collected nine dollars from you. now the yankees win. you want your five dollars. well i don't have it. because i took that nine dollars and only kept one. i invested the eight dollars in mortgage securities, which i can't sell now to cover the bet because they're worthless. on top of that, i used the mortgage securities to obtain loans using the mortgage securities as collateral. now the banks are calling in their loans because my collateral is worthless. so i owe for the yankees, i owe to the banks and the worst part is i took this bet for every person i know. i'm over-leveraged and have no means to pay back the credit default swap or the loans. that's what happened to AIG, Lehmans and Bear Stearns.

bill gross of pimco has some power. here he is answering questions.

apparently american express is paying people to pay off their balances.

the paths to repudiation.

a daily show clip is always worth mentioning.

robert smith is hating on radiohead. i've got two words for robert smith: less is more. dude, you're fifty. let's cut the pancake and teenage angst and let's start singing about early dinners and the weather channel. please.