Morgan Stanley CEO: The probability of another financial crisis is close to zero

http://www.bloomberg.com/news/2013-09-06/gorman-says-chance-of-another-financial-crisis-close-to-zero-.html

by lazydon • 13 years ago

49 59 13 years ago

Ygg2• 13 years ago

Yes and the chances that anyone making a claim that they will repeat same mistakes is close to zero.

mixmax3• 13 years ago

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.

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.

I'm fairly certain we'll see another large crisis within the next 5 years.

daliusd• 13 years ago

You just dropped bunch of facts like they mean something. Task for you: list 5 top countries by assets owned by their citizens with percents. Show those numbers taking into account population size.

mixmax3• 13 years ago

They do mean something, and are in fact worrying.

I presume that the HN crowd will understand why, otherwise I'll gladly explain.

venus2• 13 years ago

Japan is in the gutters and has a debt of 230% of GDP (twice of what Greece has)

Greece's debt is to foreigners. In a foreign currency. Big, big, BIG difference.

Japan can erase its debt with a stroke of a pen. So could have Greece, actually, but at least someone would have complained.

I mean it's ridiculous really. 230% GDP debt - it's a complete joke. Everyone knows it's unpayable, if it had to actually be repaid, which it doesn't. If you are exposed to that, you deserve what you're going to get, which is nothing. But that's OK, because no-one is exposed, because it's basically the Japanese Govt writing a bunch of cheques to itself, and the only effect will be to devalue the yen, if anyone cares, which they don't.

Frankly Japan's debt is turning into a sort of glitch in the matrix where something is obviously wrong but no-one mentions it because to do so would be to prove that none of it is real anyway.

mixmax3• 13 years ago

The bulk of Japanese debt is to large Japanese pension funds, so yes theoretically the government could just declare that the Japanese people wouldn't get their pensions and simply steal them, but somehow I don't think that's going to work...

Btw. There's an interesting problem with the Japanese debt - if you look at Japanese demographics the population is aging rapidly. This means that the pension funds that hold the debt will have to sell out because the money needs to be paid out. Who will they sell to? Every major institution in Japan is already stuffed to the gills with bonds, so there are two options: print money or sell to foreign investors. Printing money is balancimg on a knifes edge ( which is what the Bank of Japan is currently doing). Currently Japan pays an interest of less than 1%, and yet they spend 25% of their turnover just on interest payments. If you print money inflation and thus interest rises. When they reach 4% they will spend 100% of their income just paying interest on their loans. They can of course print more money and keep depreciating their currency, but history shows us that that doesn't end well. Alternatively they can try to sell bonds to foreigners, but somehow I doubt that there are any takers unless the interest rate goes up. As a comparison Greece pays around 8%.

I'm not saying that Japan will definitely go bankrupt, I'm just saying that there are some pretty big red flags, and maneuvering around them is going to be damn hard. Since there are equally hard problems elsewhere in the world economy (as I hinted at above) there's a real chance that something somewhere goes awfully wrong.

InclinedPlane• 13 years ago

This is a vastly overly facile analysis.

Let's look at the mortgage debt crisis in the US through this same lens. It's just the US owing debt to itself, so you could just wipe it off the table with no consequences. And in large part what happened was a lot of people in the US walking away from their debt. Allowing their underwater mortgages to go unpaid, letting their houses be foreclosed. It turned out to not be particularly good for anyone involved.

Japan's debt to itself won't go any better if it is written off either. There are people, human beings, on both ends of that debt, snapping the cord will have real-world consequences, it's not just numbers on a balance sheet.

leg1002• 13 years ago

Facile indeed, full of loose talk.

and the only effect will be to devalue the yen, if anyone cares, which they don't.

So if the yen is devalued to $0.0000001 they won't care? With what will they pay for imported oil? Japan might prefer a weaker currency; not worthless, but stable. Many japanese entities have foreign denominated debts, and exporters also rely on imports in some form.

Everyone knows it's unpayable, if it had to actually be repaid, which it doesn't.

The national debt of any country is not expected to be repaid. Japan is no different. Nor is the Japan the only country writing a bunch of cheques to itself. That's the essence of QE.

Japan is heavily in debt. Were they to write off that debt overnight, it would still be heavily in debt because the write-off would show up in the accounts of the bond-holders, many of whom would be made insolvent. Foreign entities would then refuse to trade with Japan. You'd merely be taking from one hand and giving to the other. There's no trickery or matrices, there's nothing unreal about any of this. The accounting practices may be absurd, but there is real value at stake, and destroying it is to be avoided, not posed as a solution.

mbesto• 13 years ago

“The probability of it happening again in our lifetime is as close to zero as I could imagine,”

How cute!

If you're interested in these types of "predictions" and assigning "probability" to your predictions, and then I highly recommend reading this book:

http://www.amazon.com/Signal-Noise-Many-Predictions-Fail/dp/...

Some gems:

“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.

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.

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.

Here's my take - Morgan Stanley actually have good forecastings that there is 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.

michaelfeathers• 13 years ago

And then there's The Black Swan by Taleb.

willeswood• 13 years ago

He's just saying he'll probably be dead before the next crisis will happen. Not too comforting coming from a 55 year old guy.

frank_boyd• 13 years ago

Well, if you consider the amount of coke consumed by executives in this industry, his statement could actually make sense.

kinleyd• 13 years ago

Famous last words.

raverbashing• 13 years ago

“Virtually no one, be they homeowners, financial institutions, rating agencies, regulators or investors, anticipated what is coming.” Nobody saw it coming

This is actually BS. SEVERAL people alerted to the housing bubble. There are currently a couple of Housing Bubbles going on around the world right now. They are being "responded to" with the same BS as in the US, that "this time it's different" or "prices never go down". Complete and utter BS

There were MANY warnings. The idea that a certain thing can/will always increase in value is so ridiculous yet so common.

How do you identify a housing bubble? Rent/Price ratio, variation in price per area (m2 or ft2) compared to inflation. Mortgage terms going up.

paganel• 13 years ago

This is actually BS. SEVERAL people alerted to the housing bubble

You're correct, but they mostly went unheard. I remember around 2007 The Economist doing a special issue on the whole CDS thing (with a nice magazine cover and all), there were 32 pages of how great these new financial products were and about how they were "spreading risk" so that we'd have no big financial crisis to speak of in the near future.

Around the same time they also published a small, one-column article in the financial section about the house-price index which was strongly hinting (the article was) that all this was a in fact a bubble which might have nasty consequences. But people preferred to pay more attention to the nice cover and the 32 "in-depth" pages than to that small article, and that goes for most of the media and its followers.

carlosrt• 13 years ago

"There were MANY warnings".

This graph, showing the 25 year decline in mortgage rates has been the biggest clue. We've been priming the economic pump for 25 years, masking systemic flaws.

Biggest warning: http://mortgage-x.com/images/graph/fhfb_contract_rate.gif

brodo• 13 years ago

There is a great episode of Freakonomics Radio on predictions: http://freakonomics.com/2011/09/14/new-freakonomics-radio-po...

TLDR:

* Everyone remembers predictions which predict radical change and where right.

* No one remembers predictions which predict minor changes.

* No one remembers predictions which where wrong.

* There are so many wrong predictions, because there are no repercussions.

* Most experts predictions are not better than layman's guesses, some aren't better than random chance.

dthunt• 13 years ago

This.

The same set of cognitive defects that are responsible for statements like this are responsible for belief in homeopathy and in the power of prayer to cure cancer (despite taking chemotherapy drugs).

People are remarkably bad at understanding the differential power of evidence with respect to their beliefs. That includes experts. Being right about what the evidence is doesn't mean we account for it correctly.

This quote, from the MS guy, is prompting me to work out the math on Bayesian updating in an incompletely hypothesized space, tonight, because I for one would like to know how/when I can rationally update my absolute and relative beliefs about hypotheses in response to weak evidence, and if this implies anything about how I should select for less mysterious hypotheses.

This seems like a really basic idea, but as a 31 year old, I am only now wrestling with the process of making less stupid decisions. I suspect the same is true for many of you.

And for that reason alone, I can't really hate on the Morgan Stanley guy, because in my heart of hearts, I think he's probably not the sharpest tool in the shed, and it should not surprise me that he develops confidence in other places that probably aren't warranted.

I can, however, hate on the world that allows people like this to be in a position to impact the world economy, just like I can be angry that there isn't a mandatory 'using evidence in making policy' training program for members of congress.

scotty79• 13 years ago

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.

lcedp• 13 years ago

It's almost like we can predict such things. Except we can't. But he making this claim makes me worry. Maybe he knows something.

ChristianMarks• 13 years ago

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.

harshreality• 13 years ago

I would love to see their prior probability distribution for that, and how it was obtained.

beedogs• 13 years ago

1 is pretty close to zero.

logn• 13 years ago

ha :)

This interview alone makes me think the probability of another financial crisis is close to 1.

"Hubris often indicates a loss of contact with reality and an overestimation of one's own competence, accomplishments or capabilities, especially when the person exhibiting it is in a position of power."

- https://en.wikipedia.org/wiki/Hubris

beloch• 13 years ago

“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.”

---

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".

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!

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.

cperciva• 13 years ago

Misconduct

That's where you and Gorman disagree. His point is that, yes, people screwed up; but no, they didn't do it deliberately. We don't throw people in jail for being bad at their jobs; we throw people in jail for deciding to do something wrong.

ronaldx• 13 years ago

This argument is a good way of justifying systematic incompetence.

If you claim that an individual was just doing their job, their superior should be held responsible for creating that job (up to and particularly including the CEO).

njr123• 13 years ago

We absolutely do throw people in jail for being bad at their jobs.

If an engineer signs off on design work which then fails and injures/kills someone due to their incompetence they can and are charged with professional negligence and sent to jail.

Although financial incompetence doesn't kill anyone, it does effect a much much larger number of people, so I don't see why we shouldn't take the same approach and make the directors of financial firms personally liable for the outcomes of their actions.

madaxe• 13 years ago

Used to work on several trading desks. Bribing your risk desk wasn't just common - it was expected. I doubt anything has changed.

pfortuny• 13 years ago

Deliberately assumming a position in which you act and bet (yes, bet) with other people's money and in which you assume NO RESPONSIBILITY is an unjust position which you accept deliberately.

Yes, it is hard to say but no, you cannot behave unjustly even if other people want you to. You cannot get a slave even if the other person wants you to get him as a slave. You cannot harm an inocent person even if he wants you to.

The problem with Lehman was, essentially, that of lack of responsibility. And this is inherently unjust.

So: with the letter of the law, they "do not need to go to jail" (say Lehman's board of directors), but with a reasonable understanding of justice, they acted in an unjust way. Wittingly.

leoc• 13 years ago

The problem is that his claim just isn't very plausible. It takes a great deal of optimism to believe that everything that happened in (in particular) the origination, packaging and rating of US subprime mortgages (including the stated-income mortgages which industry types were referring to as "liar's loans", at the same time they were making and processing them) was a product of simple ignorance and incompetence.

antr• 13 years ago

100% agree.

But like most things in life this is a two-way relationship. People who live off credit, buy homes they can't afford with +30 year mortgages, buy luxury cars with loans, etc., should also be penalised. The financial crisis was caused by a general misconduct by both financial institutions and consumers. Lets not forget that.

scotch_drinker• 13 years ago

They are penalized. They declare bankruptcy, have the cars and homes taken from them and generally have a significant stain on their credit for a substantial time period.

Alternatively, financial companies, especially in the 2008 crisis, receive small wrist slaps in the form of tiny fines and public rebukes while now, 5 years later, they are returned to record profits.

These days, almost all of us, individuals and corporations alike, live off credit in some form. The difference between individuals and the banks is that when individuals mismanage their credit, something bad actually happens to them.

bjourne• 13 years ago

Morgan Stanley and their ilk wasn't the cause of the financial crisis, it was those who trusted the stock market with our mutual funds. The largest monetary reserve in the world is the combined sum of all pension funds. It's not strange: you work 40 years and save so that you can live when you're to old to work.

Over the last 30 years all that money was gradually put in stocks. Which caused the stock markets to grow tenfold or something like that. It's a natural consequence of the law of supply and demand. The higher the demand for stocks the higher the price.

That money is the energy that keeps Morgan Stanley going. They can charge a hefty fee to manage your money because as long as more money is entering the market, the investments are profitable. Except sooner or later the pension funds will run out. When there is no more money to invest the stock market doesn't grow anymore with a predictable implosion as a result.

gcatalfamo• 13 years ago

To Morgan Stanley's CEO: Cool story bro

confluence• 13 years ago

Personally, I think most CEO's outside of hard core tech and manufacturing industries could probably be replaced with plastic ducks.

They appear to be about as effective, and are clearly as competent. They're cheaper too.

Gorman is idiot.

Imagine the chief engineer of a massive bridge building project saying the exact same thing:

"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."

Fuck.

petermcd• 13 years ago

Does he mean the probability is lower or the impact is lower?

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.

bsullivan01• 13 years ago

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.

It's not going to be long before banks figure out something else.

chanux• 13 years ago

Close to zero is not zero.

cmollis• 13 years ago

The best part is that he probably believes it.

grandalf• 13 years ago

Near zero probability with certain assumptions...

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.

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.

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".

jgalt212• 13 years ago

Of course it's close to zero, if it were not financial crises would be a commonplace event and not a crisis. Seems like a tautology to me.

S_A_P• 13 years ago

I can't be the only one who thinks that this kind of thinking is exactly the kind of hubris that causes disasters like this in the first place.

tareqak• 13 years ago

A paranoid reading of this statement is that the next financial crisis is looming right around the corner.

porter• 13 years ago

I bet that's what he said before the last crises too.

michaelochurch• 13 years ago

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.

I do find the financial industry's underplaying of risk, in general, to be pretty hilarious.

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.

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.

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.

BetterLateThan• 13 years ago

That's bankerese for "Brace yourself".

devanti• 13 years ago

since when did people trust what these finance executives say?

Morgan Stanley CEO: The probability of another financial crisis is close to zero

Related Stories