9 ms·

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

49 points by lazydon 13y ago

Ygg2 13y ago
Yes and the chances that anyone making a claim that they will repeat same mistakes is close to zero.
deleted 13y ago
[deleted]
mixmax 13y 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 13y 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.
  - mixmax 13y ago
    They do mean something, and are in fact worrying. I presume that the HN crowd will understand why, otherwise I'll gladly explain.
- venus 13y 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.
  - mixmax 13y 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.
    - venus 13y ago
      I don't really disagree with you but you're operating on the assumption that the Japanese Gov't will continue playing "the game". Bear in mind there is absolutely nothing stopping them simply declaring that they have paid back all debts. Hyperinflation happens in countries that were collapsing anyway. Under other circumstances, you could call it "quantitative easing" just like the USA has been doing, or who knows what they will call it, but mark my words, that debt will never be repaid, or if it is, it will be with "new money". If you doubt me, answer this quesrtion - why is anyone still lending to the Japanese Gov't? The answer is of course that it's not real debt. You can't have real debt to an entity that can print the currency the debt is based on. The risk is not that the Gov't cannot repay, the risk is that inflation will reduce the value of the payment, and the 1% interest tells you the assessment of that risk.
mbesto 13y 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/159420411X/ref=sr_1_1?s=books&ie=UTF8&qid=1378544836&sr=1-1&keywords=signal+and+noise 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 13y ago
  And then there's The Black Swan by Taleb.
- willeswood 13y 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 13y ago
    Well, if you consider the amount of coke consumed by executives in this industry, his statement could actually make sense.
- kinleyd 13y ago
  Famous last words.
- 13y ago
scotty79 13y 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 13y 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 13y 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 13y ago
  I would love to see their prior probability distribution for that, and how it was obtained.
beedogs 13y ago
1 is pretty close to zero.
- logn 13y 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 https://en.wikipedia.org/wiki/Hubris
beloch 13y 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 13y 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 13y 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).
gcatalfamo 13y ago
To Morgan Stanley's CEO: Cool story bro
confluence 13y 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 13y 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 13y 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.” 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 13y ago
Close to zero is not zero.
cmollis 13y ago
The best part is that he probably believes it.
grandalf 13y 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 13y 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 13y 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 13y ago
A paranoid reading of this statement is that the next financial crisis is looming right around the corner.
porter 13y ago
I bet that's what he said before the last crises too.
michaelochurch 13y 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.
deleted 13y ago
[deleted]
BetterLateThan 13y ago
That's bankerese for "Brace yourself".
devanti 13y ago
since when did people trust what these finance executives say?

49 points by lazydon 13y ago

Ygg2 13y ago

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

deleted 13y ago

[deleted]

mixmax 13y 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 13y 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.
- mixmax 13y ago
  They do mean something, and are in fact worrying. I presume that the HN crowd will understand why, otherwise I'll gladly explain.
venus 13y 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.
- mixmax 13y 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.
  - venus 13y ago
    I don't really disagree with you but you're operating on the assumption that the Japanese Gov't will continue playing "the game". Bear in mind there is absolutely nothing stopping them simply declaring that they have paid back all debts. Hyperinflation happens in countries that were collapsing anyway. Under other circumstances, you could call it "quantitative easing" just like the USA has been doing, or who knows what they will call it, but mark my words, that debt will never be repaid, or if it is, it will be with "new money". If you doubt me, answer this quesrtion - why is anyone still lending to the Japanese Gov't? The answer is of course that it's not real debt. You can't have real debt to an entity that can print the currency the debt is based on. The risk is not that the Gov't cannot repay, the risk is that inflation will reduce the value of the payment, and the 1% interest tells you the assessment of that risk.

mbesto 13y 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/159420411X/ref=sr_1_1?s=books&ie=UTF8&qid=1378544836&sr=1-1&keywords=signal+and+noise 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 13y ago
And then there's The Black Swan by Taleb.
willeswood 13y 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 13y ago
  Well, if you consider the amount of coke consumed by executives in this industry, his statement could actually make sense.
kinleyd 13y ago
Famous last words.
13y ago

scotty79 13y 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 13y 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 13y 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 13y ago
I would love to see their prior probability distribution for that, and how it was obtained.

beedogs 13y ago

1 is pretty close to zero.

logn 13y 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 https://en.wikipedia.org/wiki/Hubris

beloch 13y 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 13y 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 13y 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).

gcatalfamo 13y ago

To Morgan Stanley's CEO: Cool story bro

confluence 13y 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 13y 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 13y ago

chanux 13y ago

Close to zero is not zero.

cmollis 13y ago

The best part is that he probably believes it.

grandalf 13y 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 13y 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 13y 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 13y ago

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

porter 13y ago

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

michaelochurch 13y 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.

deleted 13y ago

[deleted]

BetterLateThan 13y ago

That's bankerese for "Brace yourself".

devanti 13y ago

since when did people trust what these finance executives say?