"Financial markets are a collection of arguments"

--- Michael Lewis, p. 79 of "The Big Short" (2010)

Extended quote:

[Deutsche Bank trader Greg] Lippman had at least one good reason for not putting up a huge fight [against the request from management to make a bet against the subprime bond market]: There was a fantastically profitable market waiting to be created. Financial markets are a collection of arguments. The less transparent the market and the more complicated the securities, the more money the trading desks at big Wall Street firms can make from the argument. The constant argument over the value of the shares of some major publicly traded company has very little value, as both buyer and seller can see the fair price of the stock on the ticker, and the broker’s commission has been driven down by competition. The argument over the value of credit default swaps on subprime mortgage bonds – a complex security whose value was derived from that of another complex security – could be a gold mine.

“Banks had lots of tools to create leverage, but not many to manage risk”

--- VC Roger Portnoy quoted in "Silo but deadly", The Economist, December 5th 2009, on the role of IT systems in the financial crisis.

“Banks had lots of tools to create leverage, but not many to manage risk,” says Roger Portnoy of Daylight Venture Partners, a venture-capital firm that invests in risk-management start-ups.

The article goes further to report that some think IT played a more fundamental role in the crisis:

"Because things are so interconnected, largely thanks to technology, a problem in one part of the system can quickly lead to problems elsewhere. The global financial markets have evolved over the years into an inherently unstable network, says Till Guldimann, a strategist at SunGard, a software and IT services firm. The rapid unwinding of positions by ultra-fast quantitative-trading programs at the start of the credit crunch in August 2007 is one example of this cascading effect."

... though it may go deeper still:

"Many banks have become too complex to be managed properly, says Glenn Woodcock, a director at Andromeda Capital Management and a former head of credit-risk infrastructure at RBS. IT alone cannot fix that problem for them."

The more you value financial stability, the more you have to sacrifice financial innovation

--- Dani Rodrik in opinion piece on regulating global finance (or not), The Economist March 14, 2009

In context:

But the most fundamental objection to global regulation lies elsewhere. Desirable forms of financial regulation differ across countries depending on their preferences and levels of development. Financial regulation entails trade-offs along many dimensions. The more you value financial stability, the more you have to sacrifice financial innovation. The more fine-tuned and complex the regulation, the more you need skilled regulators to implement it. The more widespread the financial-market failures, the larger the potential role of directed credit and state banks.

Different nations will want to sit on different points along their “efficient frontiers”. There is nothing wrong with France, say, wanting to purchase more financial stability than America—and having tighter regulations—at the price of giving up some financial innovations. Nor with Brazil giving its state-owned development bank special regulatory treatment, if the country wishes, so that it can fill in for missing long-term credit markets.

In short, global financial regulation is neither feasible, nor prudent, nor desirable. What finance needs instead are some sensible traffic rules that will allow nations (and in some cases regions) to implement their own regulations while preventing adverse spillovers. If you want an analogy, think of a General Agreement on Tariffs and Trade for world finance rather than a World Trade Organisation. The genius of the GATT regime was that it left room for governments to craft their own social and economic policies as long as they did not follow blatantly protectionist policies and did not discriminate among their trade partners.

There is almost no limit to the ability of investors to ignore the lessons of the past

--- Vanguard founder John Bogle, opening line of a Wall Street Journal op-ed "Six Lessons for Investors: Be diversified and don't assume past performance will continue", January 8, 2009.