Re: Article 1

From: Glyn Holton
Affiliation:
Address:
Date: 29 Nov 2006
Time: 07:43:34

Comments

Hi Andi: I agree that the process of calculating these risk metrics does generate a lot of useful information about risks a shop is taking. The problem is getting that information upstairs, out of the analysts' hands and into the hands of decision makers. Summary measures like 10-day 99% VaR is a poor solution. I think the problem with operational risk measurement is even more severe. There are huge philosophical problems with the whole venture. It does produce plenty of incident data. I question if it is worth the cost. I also question how clean that data is, given the human factor issues with reporting (It is often dependent on teams who make mistakes to ensure those mistakes are accurately reported.) That being said, I am a huge advocate of Basel. I criticize it only constructively. I disagree with you about the finance industry being overregulated. Since the 1940s, lobbyists for Wall Street have successfully dismantled financial regulation, at least in the US, piece by piece. Much of this has been under the radar screen, but the final demise of Glass-Steagal was much celebrated. A huge change that hardly anyone noticed was slipped in in 1996. This loosened a variety of safeguards limiting the ability of private (unregulated) investment funds to take in large numbers of investors. We have all noticed the impact--the explosive growth in the hedge fund industry. I consider this a shameful breakdown in regulation. Numerous safeguards have gone out the door. I consider funds of funds abusive. I consider the exorbitant fees hedge funds charge abusive. I consider the bogus industry performance numbers used to lure investors abusive. I consider the intimate relationships between hedge funds and their prime brokers abusive. All this stuff is illegal for regulated funds. None of it contributes to fund performance. It contributes to shaking-down of unsuspecting pension plan sponsors.

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