The Doom Loop in the Financial Sector: And Other Black Holes of Risk

Index

158 A ABACUS 2007-AC1, 83 adaptive systems: characteristics of, 31; as complex, 141 (see also complex adaptive systems); as networks, 33; similarities among, 31, 32, 33 Advanced Composition Explorer (ACE), 13 Against the Gods (Bernstein), 7 AIG (American International Group), xi–xii, 22–23; AIG Financial Products Corp. (FPC), 23, 25; New York State Department of Insurance and, 30; payout to, 24; rescue of, 25; U.S. federal government and, 23 Albert, Réka, 140–41 Alessandri, Piergiorgio, 106, 126 Alexander, Kern, 47, 52, 53–54; Global Governance of the Financial System, 29, 86 Allen, Franklin, 65 Amaranth, 45 Angels and Demons (Brown), 18 Argentina, default of, 45 artificial intelligence (AI), 77 Asian monetary crisis, 45 asset-backed securities (ABS), 37, 63–64 assets, toxic, 64–65 asteroids, 4, 14–15, 16, 20, 128–29 Athanassakos, George, 66–67 atomic bomb, 7–10 auction rate securities, 37–39 Auerback, Marshall, 57–58, 82 Index B bailouts: of AIG, xii; of banks, 96, 97; of financial institutions, 126; regulation and, 97–98 Bank for International Settlements, 48 Bank of America: Cuomo’s lawsuit against, 22; merger with Merrill Lynch, 22, 24 Bank of England: on financial stability risk assessment, 103–4; and regulation, 99; on super-systemic risk, 4, 30; on systemic risk, 72–73, 125–26 bankruptcies: of AIG, xii; domino effect of, 22–23; of Drexel Lambert, 45; gaming and, xiii; of Lehman Brothers, 22, 25; leverage and, 99; national, 89; risk management and, 50 banks/banking sector: and asset prices, 96; bailouts of, 96, 97; Basel I/ Basel II and, 47; commercial vs. investment, 98; correlation of asset portfolios, 73, 74; failures, 25, 96, 97; Glass–Steagall Act and, 46; global panic, xi; in Iceland, 42–43; payouts to, 24; and regulation, 47, 107, 126–27; regulatory arbitrage with insurance sector, 65; reserves against downside risk, 127; risk management and, xiii, 47, 50; shadow, 46; size of, 126; as too big to fail, 98 Barabási, Albert-László, 140–41 Index | 159 Basel Committee on Banking Supervision, 51–52, 63 Basel I/Basel II, 47 Bernanke, Ben, xi–xii, 26, 54 Bernstein, Peter L., 1, 92; Against the Gods, 7 Bethe, Hans, 9 Beyond Thunderdome, 5 Biological and Toxic Weapons Convention, 131 Birmingham (AL), interest rate swaps, 39–40 black-hole risks, 19–20; of climate change, 132–35; of coronal mass ejection, 127–28; of cyber-warfare, 129–30; fatal discontinuities and, 120; in global financial sector, 35, 124–27; human-induced, 6; international cooperation and, 136; in juxtaposition, 135–36; long-term trends and, 120; non-linear relations and, 121; of nuclear proliferation , 130–31; precaution and, 119–24; from smaller asteroid, 128–29; super-systemic risk and, 4; technology and, 6. See also supersystemic risk Blinder, Alan S., 80–81 Bookstaber, Richard: on complexity , 81; on complexity and tight coupling, 86, 98; on regulation, 99; and risk controls, 98; on risk management structures, 35–36; and Salomon Brothers, 69n; and tight coupling, 84; and VaR model, 92–93 Born, Brooksley, 49–50 bovine spongiform encephalopathy (BSE), 70 BP, xii–xiii Brazil, crisis in, 45 Brown, Dan, Angels and Demons, 18 Brunnermeier, Markus, 102, 138 Bush, George W., x, 26, 46, 54, 97, 136 butterfly effect, 122 C Canada: global financial crisis and, 40– 42; Office of the Superintendent of Financial Institutions, 42; regulation in, 41 Carey, Mark, 36; Risks to Financial Institutions, The, 29 Carrington, Richard, 10–11 Carrington event, 10–11, 13 cascade(s): as contagion, 75–76; defined , 31, 75–76; dispersion of risk and, 50; in financial systems, 76; interconnectivity and, 72; preceding stability and, 78; risk dispersal and, 61. See also contagion catastrophe: complexity and, 81; global financial collapse and, 60–61; irreversibility vs., 115–16; remedial action to prevent harms, 102–3; risk management against, 71, 78– 79. See also systemic collapse Catastrophe: Risk and Response (Posner), 15 catastrophic risk(s): BP and, xii–xiii; derivatives and, 74. See also blackhole risks; systemic risk(s) Catholic Church, 18 cause-and-effect relationship, 70, 121–22 CDO2 , 37, 82 CDO3 , 37, 82 CDOs. See collateralized debt obligations (CDOs) CERN (European Organization for Nuclear Research), 16, 18 Chakravarty, Shoibal, 133 chaotic functions, 122 China: and climate change, xiv; economic growth, xiv, 89, 100, 120; and Kyoto Protocol, 117, 132–33; nuclear weapons, 5, 131 Chouinard, G. A., 3 Citigroup, 22, 25, 38–39 climate change, 116–17; as black-hole risk, 19–20, 132–35; and carbon taxes, 133–34...