[OPE] Henry Hu versus Henry Liu: the Tett annals

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Fri Jun 26 2009 - 12:13:33 EDT

Insight: SEC gets tough on Wall St tribalism
By Gillian Tett
Published: June 25 2009 16:52 | Last updated: June 25 2009 16:52

In recent years, Henry Hu, a finance professor of Texas University, has
often been a thorn in the side of the banking world. In his academic
research, Hu has repeatedly highlighted the systemic risks created by credit
derivatives and other complex instruments. Most recently, he has expressed
alarm about the so-called "empty creditor" problem - or the fact that
lenders, such as banks or hedge funds, are increasingly using credit
derivatives to hedge in ways that create perverse incentives to tip
companies into default. Now, however, Hu is being given a chance to put his
theoretical musings into practice. The Securities and Exchange Commission
will soon announce that Hu is joining the agency, in a senior risk position.

There were two dimensions to the cause of the current credit crisis. The
first was that unit risk was not eliminated, merely transferred to a larger
pool to make it invisible statistically. The second, and more ominous, was
that regulatory risks were defined by credit ratings, and the two fed on
each other inversely. As credit rating rose, risk exposure fell to create an
under-pricing of risk. But as risk exposure rose, credit rating fell to
exacerbate further rise of risk exposure in a chain reaction that detonated
a debt explosion of atomic dimension.

Oh uh huh make it magnificent.
Oh, your hair is beautiful.
Oh, tonight.

- Blondie

She never stumbles
She's got no place to fall
She never stumbles
She's got no place to fall
She's nobody's child
The Law can't touch her at all.

- Bob Dylan

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