Naked Emperors Not Black Swans

The Black Swans have landed and mugged Wall Street. It’s all THEIR fault, not OURS!!! This might soon be the rallying cry of investment bankers seeking to duck (please excuse the pun) responsibility for the financial meltdown. The financial press has set the stage with articles such as Black Swans, Become Norm Instead of Exception by William Pesek of Bloomberg.com. But the analogy is plain wrong.

A Black Swan is a highly unexpected or even unpredictable event. Europeans who knew only white swans had no reason to suspect that black swans existed in Australia even if there was no biologically prohibition against their existence. And that is the key to the term, the event has to be such a probabilistic outlier that it exists but falls off the cognitive radar screen. But the present meltdown wasn’t off the radar screen. Authors, analysts, columnists, investors, and some ordinary people (including yours truly) have argued for years that these securitizations made no sense. The problem wasn’t that the event was a Black Swan off the radar screen but that Wall Street convinced everyone to turn off the radar – hence the Naked Emperor is a better metaphor.

In Hans Christian Andersen’s tale, a fashion-vain Emperor hires two swindlers to make his clothes. They pretend to make the garments, miming handling cloth, sewing, etc. while loudly proclaiming that failure to see the non-existent garments was proof of the viewer’s stupidity and incompetence – just as Wall Street told everyone that failure to understand the beauty of their models were proof of the viewer’s stupidity and incompetence and inability to comprehend the rocket science and quantum mathematics involved. Besides, everyone was making so-o-o much money it had to make sense. Eventually the Emperor paraded naked through the court and a child said what everyone else thought but was too afraid or embarrassed to say, the Emperor was Naked.

Unfortunately in our case, the cost is more than just embarrassment.