JPMorgan and Deutsche Bank account for about 20 per cent of total global derivatives exposure. The risks associated with these exposures are largely netted out. But how well? Your guess is as good as mine, and probably not much worse than those in charge of these institutions.
The belief that an aggregate of casual opinions provides a better process of value discovery than a flow of informed judgment through close engagement by investors, is an article of faith rather than a matter of empirical evidence.
The National Trust announced that a painting of a raffish Dutch gentleman wearing a white feathered hat, on display at Buckland Abbey in Devon, is in fact a self-portrait by Rembrandt, worth £30m. But who created that £30m value, and when?
There is never such a thing as a single true and fair view, only a range of possible outcomes. To assess a value from the mean outcome is as meaningless as the observation that the average person has 1.99 legs.
What happened at Enron, and in the banks, was that trading assets were marked to values that had been established not by people who knew about the contracts or the loans, but by the biased and ill-informed assessments of the traders.
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