GETTING HOLD OF THE BEANS BEFORE VALUING THEM.
GETTING HOLD OF THE BEANS BEFORE VALUING THEM. It has been observed that some of the mistakes that were made that led to the current crisis were intellectual mistakes made by brilliant people. In fact some of the mistakes occurred because brilliant people did not notice boring problems. It was intellectually interesting to construct and value fiendishly complicated instruments. Keeping track of them was boring, the kind of thing that clerks and bean counters do. I posted some two weeks after Lehman declared bankruptcy that hedge funds were still trying to determine what their exposure to Lehman was. An article in the Financial Times for October 27 reported that now, six weeks after the bankruptcy, the man in charge of administering (cleaning up) the London-based operations of Lehman says that they are still trying to get information about what securities around the world are being held for Lehman or its clients. He says, “…[W]e don’t know for certain what is out there in terms of assets. After six weeks you would expect that we’d have that information, but we haven’t.” All this is preliminary to tracing the lending and relending of rights in these assets, which is expected to take years to resolve. I wonder whether the intellectual debate over whether to use “market prices” (“marking to market”) to value these instruments didn’t divert attention from important back office issues.
For decades the navy has puslished sophisticated operations research in its Naval Research Logistics Quarterly; for much of that time — for all I know it’s still true — the navy did know what parts it had and where. Elmer