Time to stock up on Ireland CDS before the government makes doing so illegal!

They've been pretty accurate regarding Zimbabwe, not that this is some kind of monumental achievement or anything.

I wonder if the timing of the blowup was fortunate for the markets in general. They've already taken such a beating this year that they pretty much shrugged at Madoff, despite the size of the scheme. What if this had happened in 2005, when Markopolous authored this document?

Reading through the original doc, it's stunning that the SEC did nothing. The world would be better off if it didn't exist, and I'm not even a crazy Libertarian -- it's just that useless.

He didn't have a time for a stint at Amaranth in 2006?

Crichton seemed to be very interested with what you call our "over-aggrandized sense of the precision with which we can safely operate human-centered systems" - most of his books use this sort of behavior as the engine for their narrative. Since you mention airplanes, I should point out that 'Airframe' was (IMHO) an outstanding novel that opened my eyes about the level of precision and quality needed in a commercial airline. As he puts it - think of a car, and then imagine that car was driven 12 hours or more a day for 30 years.

What do you expect him to say? It bears repeating that again and again: banks believe they've figured out how to make easy money by writing out of the money puts until one day the market crashes and they all go belly up. How many more times will this happen before they'll stop doing it?

As to his attitude not being helpful for policy-making - I don't agree with that at all. Physicians, who are used to attempting to fix a complex system they know they don't fully understand, operate under the dictum "First, do no harm." Is the modern financial system that much easier to understand than a human body? How do we know that by intervening blindly we will make the system better?

Having read The Black Swan, Fooled by Randomness, and other Taleb writings, I think that he would not agree with the statement, "Because we don't understand the financial system, we should do nothing." Rather, he would say something like "Because we can't understand the relatively likelihood of extremely low probability events, we should act in such a way as to minimize our exposure to negative consequences from low-p events. Conversely, we should also act such that we can take good advantage of favorable low-p events."

How would this translate to today's problems? I think he would argue that we should assume that most large banks are or will soon become insolvent, and plan accordingly.

I would blame that entirely on selling billions of dollars worth of Credit Default Swaps for assets they had no idea as to how likely they were to default. As I understand it, the AIG Financial Products division lost more money last quarter than they'd earned in _revenue_ cumulatively up to that date. Amazing.

I explained their business to my wife as follows. Imagine I went to my neighbors across the street in 2005 and offered to sell them Housing Devaluation Swaps. I said: give me five bucks a year and I guarantee that your house will be appraised next year for more than it's appraised this year. If it isn't, I'll make up the difference out of my pocket. This is obviously a great deal for homeowners, so I sell insurance to the entirety of Atlanta (2mm households, give or take) and am making $10mm per year with little cost. Then, all of a sudden, houses start being appraised for lower values this year. If I didn't charge nearly enough in the first place, and if I spent all my money on coke & hookers (AIG FP compensation was around 50% of revenue), how on earth will I pay all these claims?

Jake, as one of my hedge fund friends points out, who exactly is going to sell you puts on a stock they aren't allowed to short? I don't know enough about options to know the details of constructing a synthetic short position by selling calls, but it seems like it should be possible. *shrug*

On the other hand, I think you're right - the reason that volatility is valuable to the holder of the call option is external to the ability to delta hedge. While I wouldn't buy a lottery ticket myself, i wouldn't turn them down if someone gave me a huge stack for free...

Paul, I'm sure you understand this but don't see it above -- illiquid paper creates insolvency in another way you don't mention. As banks mark down their "toxic waste" to market and record losses, they are crediting assets and debiting retained earnings, which (depending on the size of the writedowns) can create a deficiency of assets to liabilities --aka insolvency. The bailout could actually help in one respect but hurt in another -- if banks receive cash for securities they sell to the treasury, that makes them more liquid. But if the prices banks get are less than the values carried on their books, they could also become less solvent.

One criticism I've heard of the bailout (probably from this blog) is that it only helps banks become more solvent to the extent that it overpays them (allows them to record gains by selling them) for assets they don't want and can't sell. I have trouble believing that with all the cash still waiting to be deployed at hedge funds, distressed PE funds, etc., that the "toxic waste" issue can be solved by making that market more liquid.

Also, I don't think Chris Dodd has read "The Black Swan" (also one of my faves and an absolute must-read these days). Check out this quote from a NYT article today:

--Senator Dodd called the crisis “entirely foreseeable and preventable, not an act of God,” and said that it angered him to think about “the authors of this calamity” walking away with the usual golden parachutes while taxpayers pick up the bill.--