Savvy Avi

Engineering System D ivision (ESD) at MIT hosted a talk this Tuesday about the financial crises with Charles Ferguson, director of Insider Job . Ferguson identified the securitization chain as a major cause of the 2008 meltdown. A while back, the issuer of a loan held it to maturity and bore the risk. More recently, risk bearing moved downstream from the issuer to the investment bank and on to investors and insurers. Faculty members in ESD deal more with fighter jets and supply chains than finance. However, system thinking and system engineering methods are great tools for investigating financial systems. The securitization chain acts like a physical supply chain and the meltdown happens to be a bullwhip effect just like in any supply chain. Using System Dynamics is also a powerful tool. Risk assessments of mortgage backed securities were faulty because the risk models had narrowly-defined boundaries. Cash incentives for short term gains, deregulation, shorting on one’s ...

This blog is about management, technology and finance. And when the muses strike about art. Most of what I will write about would not be completely original, rather it would be contemplation about and reviews of publications, books and articles. After all between a job, studies, family and other activities who has the time to come up with original thoughts - only the very lucky ones: philosophers, writers and columnist. As an MIT student of System Design and Management (SDM), I also hope to write some insights about the program. I need some perspective in order to organize my thoughts and so it will probably take a few months. Another aspect of being a business (& eng) student is that I find myself reading case studies instead of the things I would normally read. Case studies will probably not be much of an inspiration, I hope they will at least be educating. I also hope that the change in my reading habits would not “dry” up my blogs.

Until reading James Rickards ' FT article (need to be a registered FT user to view) about the financial crises in Greece I had a feeling there is something fundamentally wrong with CDS trade, but I didn't understand exactly what. Other columnists say that derivative trading increased risk because: 1. they gave institutes the false sense of security in risk handling - relaying pseudo science mathematical models, as if they were the absolute truth. 2. They increased interconnection between financial institutes strengthening the domino effect 3. They made the investments more complex, harder to understand and thus less transparent. While all the above-mentioned reasons are true Rickards introduces a simpler flaw with CDS. A regular insurance has a insurable interest . An insurance company giving a person life insurance has an interest in keeping the person alive since that way they will not have to pay the insurance. CDS traders, on the other hand, have an interest to exa...