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The quill pen and asymptotic approximation -

This is a really important article from the august "Daily Telegraph" in the UK, it describes the process being undertaken right now to quantify a value for the structured products held off or on balance sheet by the UK banks, it focuses on the biggest and most controversial of the UK banks which WAS a player in this market game, RBOS for whose executives and ex-executives the UK press are beginning to sniff the opportunity for blood!

A quotation from the article: "In effect, to borrow Sir Fred's analogy, the Government-appointed debt hunters will be carrying out the accounting equivalent of dissecting all of those sausages and turning the constituent parts back into pigs. It will be a laborious, thankless task which is likely to take at least six months. But according to the Government, nothing less than the future of Britain's economy depends on it."

I just want to take a forward view, I think burrowing around in all that historic toxicity with an accounting perspective looking for “the magic spreadsheet” when the opportunity to integrate high performance analytics with “grown up” data management exists, seems to be to be a bit like driving a Morris Minor London to Brighton on a sunny day, a gravy train of fees, but the context isn't relaxed is it; people are screaming for a solution, all over the world. Or is it me going nuts again?

Professor Michael Gordy of the Federal Reserve published the Asymptotic Single Risk Factor (ASRF) as a refinement of the Perraudin Single Risk Factor approach early this millennium and in their papers on this challenge and requirement for risk quantification in structured products and banking in general these men evidence the futility of reliance upon the spreadsheet approach to risk quantification. Pre credit crunch it was frustrating and yet hilarious to see the banks and their advisers repeating the mistakes of the past, now the old process is being rolled out again, only this time its with public money and its actually driving the prime minister nuts! (I have some sympathy) all because this management layer is mathematically colour blind and terrified of technology. Gordy's paper is here;-

What was the comment quote during the acquisition? That Sir Fred’s policy was to acquire the structured products business of ABN Amro so that he could so obfuscate the combined balance sheet that it would have taken Einstein and Godel at least 3 years to figure out what it was worth, maybe there is some second derivative motivation in this medieval process being undertaken by the banks and their advisers which only a paranoid could dream up.

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Tags: ASRF, Fred the Shred, Michael Gordy, RBOS, UK Treasury


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Comment by Robert McDowell on January 26, 2009 at 7:00am
What you say is fair value comment.
It angered me however that The Telegraph could casually claim all the 'toxic' assets are 'worthless' - the general public of bank borrowers are not all insolvent along with their banks. There remains massive solid value in ABS just as when a house for sale does not have zero value in a month just because no-one has turned up interested to buy it. Somewhow we do have to distinguish more effectively between short term pricing in a financial panic from longer term fair value. And I know that's putting the matter too simply for many reasons I'll not venture into now.
I agree with you about Fred's asinine motives. Fred has another favourite quote that is madness, and not only in hindsight. He said "those who win pay more and those who lose pay less!" My Father would find that absurd. His view was, "the day you buy is the day you sell!".

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