> <i>“The probability of it happening again in our lifetime is as close to zero as I could imagine,” </i><p>How cute!<p>If you're interested in these types of "predictions" and assigning "probability" to your predictions, and then I highly recommend reading this book:<p><a href="http://www.amazon.com/Signal-Noise-Many-Predictions-Fail/dp/159420411X/ref=sr_1_1?s=books&ie=UTF8&qid=1378544836&sr=1-1&keywords=signal+and+noise" rel="nofollow">http://www.amazon.com/Signal-Noise-Many-Predictions-Fail/dp/...</a><p>Some gems:<p><i>“Virtually no one, be they homeowners, financial institutions, rating agencies, regulators or investors, anticipated what is coming.” Nobody saw it coming. When you can’t state your innocence, proclaim your ignorance: this is often the first line of defense when there is a failed forecast.</i><p><i>We need to stop, and admit it: we have a prediction problem. We love to predict things— and we aren’t very good at it.</i><p><i>Financial crises— and most other failures of prediction— stem from this false sense of confidence. Precise forecasts masquerade as accurate ones, and some of us get fooled and double-down our bets.</i><p>Here's my take - Morgan Stanley actually have good forecastings that there <i>is</i> another bubble (I would argue the education system, and the failing Euro). By instilling confidence that there isn't, it makes their bet even controllable.
“There’s a difference between incompetence or mismanagement or poor judgment or excessive risk taking from actually breaking the law,” Gorman said. “There’s nothing I’ve seen that would suggest that any of the major participants in the financial crisis should be in jail for their actions.”<p>---<p>Misconduct of financial companies goes unnoticed and unpunished most of the time, and when it is caught the penalties are usually in the form of fines that are dwarfed by the gains accrued from misconduct. Morgan Stanley is typical of Wall Street firms in that it has been caught doing a variety of dirty deeds (which are probably just the tip of the iceberg) but has been forced to pay almost meaninglessly tiny fines in "restitution".<p>The city I live in collects train-fare on the honor system. There are no turnstiles, gates, etc.. There are machines to buy tickets and trains. Occasionally, transit officers will perform a spot-check on a train that's between stations and you get a fine if you don't have a ticket or pass. If, on average, you get spot-checked once a year, then a fine needs to cost your more than a year's worth of passes or it makes no financial sense to buy them. Not surprisingly, the fine is several hundred dollars. In the financial sector, the fine for being caught is a tiny fraction of buying a single one-way ticket!<p>Gorman is absolutely wrong. Penalties for financial misconduct need to be far harsher than they are now to achieve even a basic level of deterrence. This may be very difficult to achieve purely with fines. No matter how diligently the government works to "patrol the trains" and set fines high enough to encourage honest behavior in the financial sector, the financial sector will find ways to game the system. That's their core competency! Lasting personal consequences need to exist. Jail-time is probably not the best way to deal with these sorts of crimes, but confiscation of personal property and restrictions on the jobs convicted financial felons can hold would be a very good start.
Personally, I think most CEO's outside of hard core tech and manufacturing industries could probably be replaced with plastic ducks.<p>They appear to be about as effective, and are clearly as competent. They're cheaper too.<p>Gorman is idiot.<p>Imagine the chief engineer of a massive bridge building project saying the exact same thing:<p>> <i>"We're pretty sure that earthquake we had a while back isn't going to happen again, so relax. Also, the guys who didn't build the last one up to spec really shouldn't go to jail. I mean, it was just a case of poor judgement and excessive risk taking behaviour. They weren't actually incompetent, nor did they actually mismanage anything. The bridge just fell down. We're pretty sure that it won't happen again."</i><p>Fuck.
Japan is in the gutters and has a debt of 230% of GDP (twice of what Greece has), Spain has youth unemployment exceeding 50%, Greece needs another bailout, Eurozone politics prevent banking union which seems to be a prerequisite for not breaking up the Euro. Those are just off the top of my head.<p>There are plenty of laarge unsolved financial problems in the world, and with the intercommectedness of finance a problem in one place will inevitably have consequences in other places.<p>I'm fairly certain we'll see another large crisis within the next 5 years.
Near zero probability with certain assumptions...<p>Just before the 2008 crisis the probability was also near zero. Large banks had reserves in AAA rated securities that were rated that way b/c the probability of default was near zero... until they defaulted.<p>Banks and other regulated institutions have no incentive to reduce systemic risk as long as that risk impacts their competitors equally. If there had been no QE or bailout, we'd have seen a shrinking of the finance industry and one or two of the firms emerge with all the market share.<p>There are certainly some possible events that could trigger another crisis. By definition those are thinks that the market currently considers highly improbable. They may be included in current risk models, which is why he says "close to zero" rather than "zero".
Translation: the probability of another financial crisis is close to one. When I consulted at MS, the quants set the probability of a default at one of their counterparties to be one event in 250 years. Perhaps we witnessed a very low probability event. Or their models and estimates were wrong.
Does he mean the probability is lower or the impact is lower?<p>Because I'm okay with a bank failing, so long as it doesn't need a government bail-out to keep it from bringing down the entire economy.
Yeah. Just like the previous one. Just like a tornado, supervolcano or asteroid hit or HFT system genarting losses. Non-zero but close to zero for some definitions of close.
I have quite a few friends at Morgan Stanley and many of their quantitative people are top-notch. So this has nothing to do with them.<p>I do find the financial industry's underplaying of risk, in general, to be pretty hilarious.<p>I remember when Goldman blamed a hedge-fund blow-up on three 25-sigma events happening in a week. That was in the summer of 2007. It elicited a good chuckle.<p>If you sample from a Gaussian distribution, 25-sigma is about 1-in-10^137. That's 457 bits of improbability-- if the distribution is Gaussian. Three in a row? That's 1371 bits-- comparable to drawing 65 spade royal-flushes in a row in five-card poker. The mortality risk of a 25-year-old per Planck-time (5*10^-44 sec) is a mere 179 bits.<p>Likely conclusion: financial events are not Gaussian, and existing models extrapolate poorly to new circumstances (sometimes this is out of an intentional desire to undercommunicate risks; more often, it comes from the business side's willingness to put more faith in simple models than the mathematicians that built them). Of course, this has been known for 30 years.
<i>“There’s a difference between incompetence or mismanagement or poor judgment or excessive risk taking from actually breaking the law,” Gorman said. “There’s nothing I’ve seen that would suggest that any of the major participants in the financial crisis should be in jail for their actions.”</i><p>Fine, but you should lost 99% of the company once you asked the FEDS for money. They should have been a vulture lender, like Morgan Stanley and heir ilk are.<p>It's not going to be long before banks figure out something else.