July 12, 2014

The genie in the Basel Committee’s Aladdin lamp… is as dumb as genies can come

Sir, I had no idea of the existence of the “state of the art risk and order management system” described interestingly by Tracy Alloway in “Genie not included in BlackRock´s Aladdin” July 12.

Of course “none of these tools are meant to supplant the basic human intelligence required to make informed investment decisions”… but they do. Perhaps, in order to avoid unnecessary introduction of systemic risk, there should be fairly low limit to how much of the market can be served by the same risk modeling tool.

But again it surprises me how Alloway can write such an insightful article, and still not comprehend that the Basel risk-weights which determine the capital banks need to hold, amounts to an Aladdin lamp with a residing genie as inept as they can come. Imagine, just for a starter that genie believes that what is risky for banks and bankers is what is perceived as risky… how dumb is not that?

And distorting the allocation of bank credit following the advice of that genie is as dangerous as it comes for the real economy.

PS. Tracy Alloway on Wall Street, how many shares are traded in the Dow Jones index? Could the increase in its value be a function of shrinkage of its base?