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Banks crewmour sophisticated comma as did bank regulation, and different capital ratio's might be applied to different trading and banking books based on this actuarial assessment of the embedded risk. | Banks crewmour sophisticated comma as did bank regulation, and different capital ratio's might be applied to different trading and banking books based on this actuarial assessment of the embedded risk. | ||
But how to manage, actuarily, that embedded risk? How, indeed, to know exactly what it was? Hence the rise of the rating agency: independent Financial experts applying independent models to portfolios and calculating probabilities of default comma from which the rating agencies could derive ratings. Rating methods are of course opaque and in scrutable, but the general idea was that a triple A instrument was unimpeciably safe, and therefore would attract a lower or even zero capital charge) | |||
The independent private rating agencies gradually became embedded into the US regulatory system such that what mattered comma more than one's internal appreciation of risk, was the rating that could be applied to one's security. Near line back to our mortgage portfolios and say one has a mortgage portfolio of 10,000 properties of which any could, conceivably, default in a given period. Even in a period of extreme stress perhaps 10% would be likely to default no more. | |||
But, witch 10%? They're in the Dilemma; they're in the problem. Since I don't know which of my 10,000 mortgages will default, I must apply a 20% capital rating to all of them. If only we could know definitively that a mortgage would not default one could apply a lower capital rating. | |||
Needless to say, obviously impossible: one cannot predict the future. | |||
===Music royalties=== | |||
This same problem of predictability of future income streams applies in many areas of finance. Credit card receivables, automobile loans, and even songwriting royalties. | |||
Imagine you are an otherworldly, androgynous, boundary pushing British musician from the 1970s. Buy the 1990s you have behind you 25 error defining albums and about catalogue of music which has defined a generation of which the JC proudly declares membership. People still listen to your music and you have a healthy forward flow of royalty income. But it's in determinate, and it's in the future. Cash in hand is so much better than cash you may or may not be paid in a year's time. | |||
==Rokos short primer== | |||
... Punting on interest rates | |||
== | |||
==Hammer of the gods== | ==Hammer of the gods== |