The 2007-08 crisis resulted not because of a natural Black Swan, but because of one bred by the Basel Committee.

“Martial arts legend Bruce Lee, whom many people regarded as immortal, died at the age of only 32 of a cerebral edema, or brain swelling, after taking some sort of aspirin. I have not the faintest idea whether that pill actually had anything to do with his death but I have frequently used (or misused) this sad death as an example of how an organism could be in such a highly tuned and perfect condition that it could not resist a small external shock.

And as a consultant I often used this metaphor to explain why companies nowadays, pressured by the stock market’s expectations for the next quarterly results; the latest theories in corporate finance as to how squeeze out the last drop in results; and, perhaps, even some bit of creative accounting, might be so well-tuned (no little reserve fat left) that they would not be able to withstand any minor recession. (Whenever I expose this theory, I can see in my wife’s eyes that she believes this is just my preparing an excuse for my growing—ok, grown—midline.)”

That and which I wrote in my book Voice and Noise (2006) should be more than enough evidence on how much I share and enjoy Nassim Nicolas Taleb’s discussions on fragility and the need for redundancy.

But where I have serious disagreements with NNT is when he relates his “black swan” to the financial crisis that occurred in 2007-08. And not because it was not a black swan event to most, it sure was, but because it provides bank regulators with the perfect excuse to avoid accountability. That Black Swan was not a natural black swan, it was a man made black swan… it was a Black Swan bred by the loony portfolio-invariant-credit-risk-equity-requirements for banks. 

For instance when NNT writes in “Thinking” 2013 “use of probabilistic methods for the estimation of risks did just blow up the banking system” I have to jump out of my chair to shout No! It was the use of the wrong risk factors that blew up the banking system. The Basel Committee used the risks of the banks assets when setting the equity requirements for banks, and not the risks banks would not be able to manage the risks of those assets.

Empirically, in terms of causing major bank crises, it is clear that banks are much worse managing “safe” assets than “risky” ones.

And when NNT, in the same chapter of “Thinking” writes about his four quadrants: Simple binary decisions in Mediocristan; Simple decisions in Extremistan; Complex decision in Mediocristan and; Complex decisions in Extremistan…no matter how much I agree and find that interesting, it has nothing to do with the bank 2007-08 bank crisis.

My more directly applicable to banks quadrangle, which explains the consequences for bank based on the ex ante perceptions of asset risks and ex post realities, IS THIS