Wednesday, September 17, 2008

Mr. Snow is correct...

...about the complexity issue. Also remarkable is his understanding about the velocity of regulatory measures - decisions made on incomplete information in volatile environments will be wrong...especially when they are massively scaleable.

A centralized information gatherer will make decisions slower and with more error. This scaleability problem increases with complex businesses like AIG. "Risk Management" is a misnomer when you have a large exposure to a risk that has no history to be quantified. Acturarial tables are just not applicable to reflexive systems of human interaction.

By Alison Fitzgerald

Sept. 17 (Bloomberg) -- Former U.S. Treasury Secretary John Snow said credit markets are almost ``frozen'' and called the government takeover of American International Group Inc. a ``huge'' failure of risk management and regulation.

Snow, chairman of private-equity firm Cerberus Capital Management LP, said today in a telephone interview that capital markets are on the verge of seizing up.

``Our debt markets are close to frozen'' he said. ``Unless we get this fixed pretty soon, we're in for a big, big, deep slowdown.'' The economy faces a ``a tough year'' in 2009 followed by a ``good upward swing'' in 2010, he said.

Snow said insurance companies such as AIG are so complicated and their businesses so expansive that state-by- state regulation is inadequate to oversee them.

``This is a huge blowup of the risk management system,'' he said. ``How could a New York regulator possibly have a vision of all the systemic risk of that company?''

The Federal Reserve, with the support of the Treasury, late yesterday announced plans to take control of the nation's largest insurer to prevent its collapse. The U.S. government extended as much as $85 billion to AIG and took a 79.9 percent stake in the company's equity.

Snow said the U.S. needs to revamp the structure of financial services regulations. Still, he warned against moving so quickly that there are unintended consequences. ``There's a huge danger that needs to be guarded against -- that we'll have a tremendous overreaction in regulations,'' Snow said.

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