Description: The crisis has spread due to a systematic failure of the regulatory system. Over the last 20 years, regulations that fostered market stability were eliminated and new financial instruments were allowed to propagate without any real oversight. Instead of bailing out weak financial firms, we should be liquidating them. All doubtful asses need to be written-downs. We need accurate and transparent accounting.

Description: The roots of the crisis are understood on a simplified basis, by 3 Ls: a Lack of accountability b Leverage and c Liquidity. Historically, people requiring mortgages sought their mortgages from local institutions that would conduct the evaluation and hold the risk. Loan officers of these institutions were accountable for the outcomes of their decisions – defaults were a direct reflection on their judgment. Leverage was a second key factor. Institutions guaranteed mortgages against default. The third L, liquidity, because a problem. When property values eventually evidenced their inevitable fall, defaults occurred at historically high rates.

Description: The liquidity crisis and the insufficient depth of the market led to a strong correlation crisis: many risks that could be considered as close to mutually independent in the classical regime suddenly became strongly positively dependent. More correlation crisis may happen in the future. We need to be more careful with black-box tools and to train what I would define as “quanlitative analysts” “Quanls” in the Enterprise Risk Management ERM process, that is risk managers who are able to lead interdisciplinary ERM studies from a jointly qualitative and quantitative point of view, with an emphasis on dynamics.

Description: It is the belief of this author that the subprime mortgage mess was none other than a Ponzi scheme repackaged into 21st century financial engineering clothes. What makes this scheme particularly disastrous is that the 21st century Ponzi mortgages were packaged and sold to investors and then trillions of dollars of derivatives were constructed based on the underlying mortgages, magnifying the problem by orders of magnitude.

Description: The world of the local S&Ls, the partner-owned investment bank and Bretton Woods isn’t coming back. So what does that leave us to do next? Part of me is persuaded by the second law of thermodynamics, which says that existence gets progressively more and more disordered with the passage of time, since any work done to address the current crisis expends more energy and causes more disorder than it fixes.

Description: Complex models can provide a false sense of security, hiding the evidence that the entire range of indications may hinge on one or two key assumptions. Use data-driven assumptions, making sure the time series includes stressed environments when possible. If a model of underwriting risk indicates that the probability of accident year combined ratios experienced from 1998 to 2000 is remote, it is not a realistic model

Description: The current financial crisis underscores the need for companies to take a sobering look at their approach to risk management. Among the many lessons to be learned, one is immediately clear: The subprime debacle represents a failure in risk management, rather than a failure of risk management.

Description: The present crisis in global financial markets has created an impression that enterprise risk management ERM has failed broadly to protect the safety and soundness of the financial system as well as that of many institutions, including insurance companies.

Description: Crises are devastating. They leave behind a high amount of entropy unemployment, poverty, lack of safety. But this is half the truth. The other half says that crises are to some extend good, because they provide a natural crash test to discover current practices’ risks and limitations, and in response, give rise to more efficient regulation, to financial innovations and to the wakening of the vitalizing powers of society, as the old and corrupted die and new ideas emerge and give us the opportunity to reflect upon the future we want to have.

Description: Arguably, many of the fundamental contributing factors to the 2008 mortgage crisis involved misdirected incentives and misinformation available to key participants in the housing finance process. The incentives discussed here include those of the mortgage holders, mortgage intermediaries, mortgage providers, securitizers, raters and CEOs and other highly paid staff of those involved. Unless similar incentives are recognized, future public policy decisions will again fail to avoid this system-wide risk. Since I am most familiar with the U.S. situation, my comments will be limited accordingly.