‘Black Swan’ Author Taleb Asks Why Bernanke Kept Post

By Le-Min Lim and Bob Chen

Sept. 28 (Bloomberg) -- Nassim Taleb, author of “The Black Swan,” questioned why Federal Reserve Chairman Ben S. Bernanke, and Treasury Secretary Tim Geithner kept their posts after failing to foresee the collapse in global credit markets.

Bernanke was appointed to a second term last month by President Barack Obama, while Geithner took his job after being the president of the New York Fed from November 2003 through January of this year. Current National Economic Council Director Lawrence Summers was treasury secretary between 1999 and 2001.

“Bernanke, Geithner and Summers didn’t see the crisis coming so why are they still there?” Taleb told a group of business people in Hong Kong. Bernanke is like “a pilot who didn’t see a hurricane,” he added.

Bernanke said on Sept. 15 that the U.S. recession had probably ended, following a financial meltdown that caused more than $1.6 trillion of losses at the world’s biggest financial institutions. Taleb said the risks that caused the global crisis are “still with us” and urged the U.S. government to avoid burdening the public or future generations with the cost of the bank bailout. The national debt is $11.77 trillion, U.S. Treasury Department figures show.

“The solution is simple: we have to sweat it out,” he said. The U.S. has “to kill the debt,” not pass it on.

As the founder of New York-based Empirica LLC, a hedge- fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to protect investors from market declines while profiting from rallies. He now advises Universa Investments LP, a $6 billion fund that bets on extreme market moves.

Complex Derivatives

To curb volatility in financial markets some financial products “should not trade,” including complex derivatives, Taleb said today. He said that, while products such as options are acceptable, he still doesn’t understand some derivatives after 21 years in the industry.

Taleb wrote the 2007 best-seller “The Black Swan: The Impact of the Highly Improbable,” which argues that history is littered with rare, high-impact events. The black swan theory stems from the ancient misconception that all swans were white.

Many people, such as traders, benefit from these black-swan events and it’s up to regulators to ensure rules and disincentives are in place to discourage them from triggering these occurrences, he said.

Simpler Products

These events, by their dramatic and random nature, defy prediction and forecasts. Data currently used by governments and top economists to predict risks and forecast future performance are based on the routine, not occurrences that could cause stock portfolios to “lose 50 percent of their value in a day.”

With the advent of the Internet, the Blackberry and other tools that allow for near-instant communication, so-called black-swan events will become more frequent. One way for regulators to counter that randomness is to make financial products, “simpler, less mathematical.”

The government and finance industry could have eliminated most of the risks they faced by keeping debt low, Taleb said. China’s financial system is “more robust” because of its lower indebtedness, he said. Taleb said he doesn’t know China and Hong Kong enough to comment on their systems’ potential hidden risks.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net; Le-Min Lim in Hong Kong at lmlim@bloomberg.net.