Paul Wilmott, a senior “quant” who has been warning bankers that the mathematical models they use to value their more complex assets were flawed for years, is feeling vindicated right now.
Long before the credit bubble burst Wilmott, founder of training and consultancy group Wilmott Associates and author of Quantitative Finance, was standing up in front of paying bankers, and telling them that they were over-dependent on mathematical formulas — and that they were being too greedy. They didn’t like it and a few delegates stormed out of the conferences, slamming the door behind them.
If only those shirty bankers had listened.
The global banking and financial crash of 2007-9 has wiped $3 trillion off banks’ balance sheets worldwide. Not only was Wilmott right about bank assets being overpriced; he was also right in warning that the banks’ fortunes were much more closely intertwined with those of each other than had previously been thought. If one sub-prime mortgage collapsed, it sent ripples and waves (and finally tsunamis!) right across the global financial system.
Interviewed by the Guardian, Wilmott said: “Following the formulas was a bit like relying on your seat belt to drive crazily. People in risk management don’t know a fraction of what they should; they’re not sceptical, they haven’t tested the data or used their imagination to find solutions.”
Wilmott also warned that the approach the government of Gordon Brown has adopted to the crisis is misguided. The quant claims that the plan to insure more than £500 billion of banks’ dodgy loans through the asset protection scheme is flawed and unlikely to work unless further banks get involved (to date just two banks, Lloyds Banking Group and RBS, have signed up, leaving others like Barclays and HSBC outside the programme).
Wilmott does not believe that interbank lending, which by its very nature is circular, will be restarted unless and until more banks become involved.
He said: “Governments know nothing of this subject. They spent two minutes thinking about it, without considering the consequences or getting [advice from] consultants. They’re like rabbits caught in headlights. They are only talking to the bankers who got us into this mess, or Lords or Ladies who know nothing. They should be getting advice from people like me, who saw this coming.”
According to Wilmott, UK regulator the Financial Services Authority isn’t much better. “They can’t afford to pay the best people; we should send regulators on derivatives courses so they could ask questions to the banks.”
Wilmott also said that he is furious with the large number of “idiots” working in finance, many of whom lack any real understanding of what they are doing and who got us into the current financial crisis.
Addendum 12 February 2010: Further to Sara Miller’s comment of today’s date, yes I am worried about levels of debt in economies including the US and UK — and that’s before any mention of Gordon Brown’s nonsensical belief that you can sort out an over-leveraged economy with more borrowing, a belief he seems to share with Barack Obama.
This blog post was published on 2 May 2009. To read the original Guardian article, by Elena Moya, published on Friday, 1 May 2009, click here
I know this might not be the most appropriate place to post this but for other readers living in the USA are you concerned about the debt? It just seems like it is getting to the point where the country is going to go bankrupt and my husband and I are just a little concerned that our kids and grandkids are going to have some big problems in a few years. Thanks for letting me vent, Sara