From Mr William Gamble.

Sir, I agree with John Authers (The Short View, May 14) about the present interest in ornithology. The point about black swans is not that they were unique; it is simply that the Europeans did not know about them. The same is true of the credit crises.

The issue is not the rarity of the event, but the quality and the availability of information. The present subprime crises occurred because securitisation changed the economic incentives for lenders. Since it was no longer necessary to keep a loan on their books, their economic incentive was to make as many as possible without regard to quality.

They lost the economic incentive to get and update information. As George Soros put it: “Securitisation had the effect of transferring risk from people who are supposed to know risk and know the borrowers to people who don’t.”

The problem with any management model is that it is based on the information put into it. If there are economic incentives to provide bad, late or incomplete information to the markets, problems will occur. There are enormous economic incentives in both developed and emerging markets to obfuscate, spin or simply lie.

No set of regulatory regimes can provide sufficient legal disincentives to solve the problem even in the most open law abiding markets. They do not exist in others. As Warren Buffett points out: “If I cannot understand an annual report, perhaps someone does not want me to.”

The point for risk managers is not that the numbers or models do not accurately forecast rare events. It is that obtaining and understanding accurate and complete information is in itself a rare event. It's not the unexpected that causes trouble. It’s what is ignored, unavailable or untrue.

William Gamble,
Emerging Market Strategies,
East Providence, RI 02914, US