09 March 2009

Financial "Engineering"

[When] you need financial models the most — on days like Black Monday in 1987 when the Dow dropped 20 percent — they might break down. [...] Dr. Merton and Dr. Scholes won the Nobel in economic science in 1997 for the stock options model. Only a year later Long Term Capital Management, a highly leveraged hedge fund whose directors included the two Nobelists, collapsed and had to be bailed out to the tune of $3.65 billion by a group of banks.

(New York Times, "They Tried to Outsmart Wall Street")

Why is financial "engineering" even legal? We ban much less dangerous activities.

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