Sunday, November 02, 2008
Man in the Center: Gary Gorton
The WSJ has a neat article on Gary Gorton, an adviser to AIG. It seems he was paid millions to review various derivatives models for AIG, and this lead them to be a bit more comfortable with their risk than they should have. He wrote a very good article on subprime that he presented at Jackson Hole this year. The article does not give enough information to really understand what mistakes he made, and as AIG failed, we can assume some were made. But Gorton is a thoughtful person, hardly the naive, overconfident geek so many caricature (Warren Buffet's great quote: 'beware geeks bearing formulas').
I think Gorton is best situated to highlight the key issues in this financial crisis, which involved not merely a subprime meltdown, but some sort of accelerator mechanism that lead to a daisy chain of financial firm failures. As the details of the credit default swaps are generally unobserved, it is hard to know what assumption were most incorrect and material.
As with any complex system failing, there were many independent errors that lead to this debacle, and I'm sure it will take a long time to sort it all out. After all, the take-away for a generation after the Great Depression was that people over speculated, and that the New Deal and then World War 2 saved the economy (eg, see Galbraith), and only much later did people focus on quite different factors as the impetus and accelerator of this crisis. In other words, financial crisis are almost never fully understood within a decade of their occurrence, if ever.