Wednesday, September 7, 2011

External article: 'The Financial Zoo: An Interview with Satyajit Das – Part I' (at Naked Capitalism)

Satyajit Das is an internationally respected expert on finance with over 30 years working experience in the industry. He is also a best-selling author and a regular contributor to leading finance blogs – including our very own Naked Capitalism. His new book ‘Extreme Money: Masters of the Universe and the Cult of Risk’ is out now and available from Amazon in hardcover and Kindle versions.

Interview conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.

Most delicious excerpts:

Fraternities; ‘frat boys’ (and they are mainly boys) as the Americans would say. It’s a monoculture. They generally go to the same schools, the same universities; they have similar backgrounds and spend time with each other reinforcing their narrow worldview. Even the few outsiders who make it in – usually by dint of sheer desire and skill, usually in making money – seek to be ‘insiders’. It means that they can only see the world through the same lenses and perspectives. They can’t think outside the consensus – whatever it is at a given time. They can’t see that things could be different to what they perceive it to be.

They also see themselves as superior beings – ‘God but with a better suit’. The reason for their superiority is that they make more money than anyone else which in my view is purely accidental.


It’s amazing how much money you can make just shuffling paper backwards and forwards. Malcolm Gladwell wrote a piece praising John Paulson who made a killing from the subprime disaster as an entrepreneur. But what did he make? What did he leave behind?


It’s silly to think that everybody in finance is ‘evil’ or engaged in fraud (though there are people who assert that). Most people involved are very smart, diligent, hard working and passionate about what they do. Ironically, so were most of the people who created great social upheavals – the Chinese Cultural Revolution, Pol Pot’s Year Zero project, pogroms etc.

It’s ‘groupthink’. They have ways of thinking about the world. They think it’s the right way so they keep trying it again and again. At least until there is a horrendous disruption and then they go: “Oh dear! There’s a problem.”

Take Alan Greenspan. He thought deregulated markets were the solution. He thought that any problem could be fixed by flooding the system with money. He was wrong, but even today he doesn’t really see that his world view is erroneous. They are very good at rationalisation and don’t tolerate dissent.


Finance has led to a serious misallocation of resources. The best and the brightest moved from real engineering into financial engineering. If you believe that real growth comes from innovation, improvements in productivity etc. then this was a serious issue.


Most financial models are wrong, only the degree of error is in question.


The models were really created to package up relatively simple products and make them more complicated to allow banks to earn economic rents – that is, excess returns – from them. They were designed to arbitrage capital rules and increase leverage. They were also useful in helping banks’ upfront earnings. Everybody appeared very clever, but it was all kind of a fake sophistication.


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