Much like Circe warned Odysseus of the dangers of the singing Sirens, we are once again warned against quants and complex mathematical formulas like gaussian copulas, or sophisticated structures build upon them. In hinsight it seem remerkable that quants could get so powerfull in the short span between LTCM folded and Lehmann. The profilation of securization and the hedge fund sector surely has meant an increasing demand for these highly interlectual academic minds, some of the best going to Rentec running black-box schemes, we will never fully comprehend.
However the common denominator in financial crises through time and going forward, is the human nature of greed. We may have specific aspects like the role of incentives and how they shape behavior, complex models taken to far as in the case of CDO-square and cubes, dodgy rating agencies, or accounting mark-to-model guidelines working as catalysts. But it will always be greed, working as the fundamental factor.
So because we are now capable of creating complex constructs beyond our controls, it seams sensible to address the fundamental issue of systematic risks.
Just as a diet is a form of regulation to keep you from eating too much, financial regulations must prevent individuals and institusions from doing what they would otherwise like to do. Like when Odysseus passed the Sirens, we devise regulations to temper natural human tendencies.
But i doubt it will work..greed is the most agile, forcefull energy in the financial construct, and it will eventually flow to and destroy the weakest elements of our systems..by design.
