The now bankrupt investment bank Lehman Brothers invested heavily in the politics of global warming and were hoping to make millions out of emissions trading. In an earlier blog post entitled ‘Bankrupt Lehman Brothers Promoted Global Warming’ I suggested this was part of their undoing. According to Graham Young the issue is not specific to Lehman Brothers, or global warming, but rather systemic, and it has everything to do with computers and modelling.
“In the real estate investment and development industry computer models never really took over. Valuation practice meant that valuers had to check their calculations by using at least two, and preferably three methods for comparison. Cost of construction and direct market comparisons didn’t negate computerised discounted cashflow models, but they did mean banks wouldn’t lend to you on the digital blue-sky valuations. The models might be right, but few lenders were prepared to risk their shirts on them.
“I know I soon realised that if it didn’t work on the back of an envelope, then making it work with a computer program was very dangerous.
“The same thing can’t be said for equity and credit markets, where asset pricing models for risk have taken over at the large ticket end of things. Which brings us to the sub-prime mess.
“Even though a cursory explanation of how the mortgage packages were structured sounds daft, the models said that they were fine. GIGO (garbage in garbage out) is the technical term for this. And the models were so complex, and the products they were used to produce so opaque, that no-one really knew the full risks of what they were “investing” in.
“And at the bottom of the pile, making all of this possible with abstract computerised models, were undoubtedly a lot of physics and maths graduates.
Which is pretty much where we are with climate change.”
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Don’t forget there is a community thread at this blog. Breaking news over there includes the retirement of Don Burke as chair of the Australian Environment Foundation.