Learning from Our Mistakes

While irresponsible media outlets are busy proclaiming the end of a 'short, sharp' recession, the US yesterday officially entered into the worst one it has experienced in 50 years. The economy slowed by 6.1% in the first quarter with the biggest drop in exports in 40 years. Consumers are reining in spending, perhaps permanently, as a 'new frugality' begins to bite. Meanwhile investment banks are going hell for leather backwards, trying to regain their status as big swinging dicks in the trading world, and to get their pay packets back to 'normal', i.e. obscene. Have they learned anything from their mistakes? I ran into quantitative finance guru Paul Wilmott yesterday in Boston, where he is promoting his masters' class for quants. Paul said nothing has really changed since the financial crisis. Banks don't do proper stress testing of their own portfolios, because they don't want to know the answer. Wilmott developed a model in 1995 - called Crash Metrics - for testing just the kind of scenario we have so recently experienced. But few, if any, banks employed it. Paul said: "My fear is that we'll go back to where we were [before the crisis]. Now the papers are onto swine flu." Plus ca change...