[Cryptography] North Korea and Sony

[Henry Baker]

At 04:15 PM 12/10/2014, John Levine wrote:
>There have been efforts to decouple, notably increasing the amount of
>capital that banks have to hold, which increases how much damage they
>can absorb before passing it along, but of course they've strenuously
>resisted that, becuase higher risk means higher returns in the short run
>which means higher management bonuses.

Quite so.

Big banks have a problem.  They sell a totally fungible commodity,
money, and there are many competitors.  Since they are price
"takers" (except when they're colluding -- e.g., interest-rate
price-fixing scandals galore), their only other option (pun
intended) is to reduce costs.  The easiest way to reduce costs
is through "tail stuffing", wherein ordinary risks are converted
into extra-ordinary risks by means of various derivatives -- e.g.,
options, futures, etc.  For 9999 days out of 10,000 (for example),
these strategies reduce volatility and increase profits, but on
the 10,000th day, the losses can greatly exceed those of the other
9999 days put together.  But by then, the people who put together
these strategies have long since collected their bonuses and moved
up into even more lucrative positions.

Of course, every few cycles of these strategies, the losses are
so large that the existence of the bank, or even the bank's country
(e.g., Iceland, Ireland, Switzerland) are threatened.  This, in a
nutshell, was the situation in 2008.

The best explanation for all of this is found in Nassim Nicholas
Taleb's various books, including "The Black Swan".  Taleb got his
start as a derivatives trader, so he knows exactly what goes on.