Right now I am reading a book called When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein. The book parallels so much of what happened to contribute to the Credit Crisis, that I feel if enough Wall Street Execs had read it, perhaps the credit crisis wouldn't have been so disastrous.

Anyways, For those of you who read Michael Lewis' Liar's Poker (if you haven't, I definitely recommend it), When Genius Failed is a continuation of the story of ousted Saloman Brothers partner, John Meriwhether. Meriwhether, was a head honcho at Saloman specifically because he created the "Arbitrage Group" where he recruited Ivy League Graduates, MIT Professors and Nobel Winning Laureates to calculate models mostly to determine the direction of bond spreads.

When Meriwhether was ousted at Saloman due to a scandal, he convinced many of these "genius" people to start a new hedge fund with him and called it Long Term Capital Management (LTCM). After its inception in 1994, the fund grew exponentially and at one point became the largest hedge fund in the world, with a market capitalization above Merill Lynch. Much of this was because Long Term's partners devoted its resources to perfecting the models it had created at Saloman. Armed with models such as the renowned Black-Scholes, which calculates volatility (Scholes was actually a partner in LTCM), LTCM was able to make a handsome profit off of the narrowing yield spreads of European bonds particularly between Germany and Italy. This was so profitable that if one had invested $1 in LTCM at inception in 1994, by 1997, it would have become $2.85 (almost a 300% return). However, this enormous success eventually got  into the heads of the "geniuses" who worked at LTCM. They became greedy, disregarded their calculations and took on added risks and leveraged their company to the zilt. They veered off their traditional track of calculating bond spreads and instead began piling billions in equity derivatives, risk arbitrage and credit default swaps of which no model can ever calculate. This eventually led to their fall when they invested heavily in the Russian Ruble and Russian Sovereign Debt (both of which defaulted in 1998).  It's partners, including Meriwhether lost everything they had. Eventually, it took the US Govt under then Treasury Secretary Robert Rubin and the Fed under Alan Greenspan, along with a consortium of the nation's investment banks to buy up the company's assets in order to prevent a wide spread market panic and collapse. All this happened in 1998.

Yet, a decade later, no one seems to have learned from the lessons of LTCM. Lehman went bankrupt. Merrill was forced to merge. Citigroup and AIG had to be bailed out. Fortress Investment (currently one of the largest hedge funds in the world...coincidence?) is rumored to collapse. All of this because the Credit markets thawed and froze over due to the collapse of the credit default swap and derivative markets much like what happened in 1998 but to a greater international scale.

Of course, you can accuse me of smugly saying all this in hindsight, but perhaps history, if not properly taken into consideration.....does repeat itself?

We Are What We Learn
by Ray Fisman

How professors can turn bleeding hearts into capitalists--and vice versa.

What is fair? (poverty in prosperity's midst) or efficiency (if we tax too much, perhaps no one will bother to do any work).

Different people value different things. According to the World Values Survey, Americans are less than half as likely as Finns to support income redistribution if it comes at the expense of incentives for individual effort.

Where does the Finnish mania for equality come from? And why the American obsession with efficiency? Presumably, our parents and teachers have a lot to do with it. Kids in Finland are taught from a different lesson plan, so to speak.

But is there any hope of changing the views of fully formed adults as they sit through classes in, say, business or law school, learning about (in some cases) the world according to Milton Friedman or Ayn Rand? Exposed to these compelling intellectual frameworks, which emphasize market efficiency and model human behavior as driven primarily by rational self-interest, do students become more "American" than "Finnish"?

It is not easy to measure the effect of indoctrination (or, more euphemistically, "learning"). Students don't randomly decide to study, for example, economics rather than French literature. Perhaps the econ majors were efficiency fanatics to begin with.

Except, it turns out, at Yale Law School. All students are required to take courses in contracts and in torts, and they're randomly assigned to an instructor for each class. Some of these teachers have Ph.D.s in economics, some in philosophy and other humanities, and some have no strong disciplinary allegiances at all. Professors are encouraged to design their courses as they see fit. Instructors from economics may emphasize the role of contracts in making possible the efficiency gains of the marketplace, while philosophers may emphasize equal outcomes for contracting parties. So economists teach about efficiency and philosophers teach about equality.

To figure out whether this affected their young charges, we put 70 Yale Law students in a computer lab, and had them play a game that would reveal to us their views on fairness. (The study, which was coauthored with Shachar Kariv and Daniel Markovits, can be found at www2.gsb.columbia.edu/ faculty/rfisman/forbespaper.pdf.)

The students made 50 decisions about giving. In some cases students started with $10, and for each dollar they gave up, their (anonymous) partner in the game would get, say, $5. In this case, giving was "cheap." In others, giving was expensive (each dollar given up yielded only 20 cents for the partner).

Someone who gives a lot when it's cheap and keeps most of the pie for himself when giving is expensive focuses on efficiency: He's making sure the maximum amount is paid out to him and his partner combined. Someone who keeps 80% of the pie when it would be cheap to give is more focused on equality. Someone who always keeps everything, regardless of the price of giving, is just plain selfish, the very embodiment of the rational, self-interested Homo economicus.

It turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness. Students assigned to classes taught by economists were more likely to give a lot when it was cheap to do so. But they were also much more likely to take the whole pie for themselves.

These findings hint at the influence that powerful ideas may have in shaping how we see the world, even late in life. It's also a sobering message for teachers such as myself. The students in my classroom will venture forth into the world of business and management, carrying with them some of the viewpoints and attitudes that I choose to emphasize in my lectures. Students learn much more than the facts; what we choose to communicate to them is a responsibility not to be taken lightly.

--

OUR FIRST MUSIC VIDEO

to 50 cent - Disco Inferno.

stayed up till 5 in the morning doing this vid. listen carefully to the lyrics cuz the props go with it. hehehe and yes try not to conentrate on my reckless dancing. try.... =P