Thursday, February 26, 2009

Taleb Says Crisis Is Harder to End Than Depression (Update1)

(Bloomberg) -- The financial crisis will be harder to end than the Great Depression and may force banks to be nationalized, “Black Swan” author Nassim Nicholas Taleb said. A more complex financial system makes the current problems, which cut global stock market value by 55 percent to $28 trillion since October 2007, worse than the contraction in the 1930s, Taleb said in a Bloomberg Television interview today. Bonuses paid on Wall Street encouraged risk taking with no regard for losses, he added.

Rare and unforeseen events are known as “black swans,” after Taleb’s 2007 book, “The Black Swan: The Impact of the Highly Improbable.” The financial crisis isn’t one, he said.

“The black swan for me would be for us to emerge out of this unscathed and return to normalcy,” Taleb said. Compared with the Great Depression, this crisis is “very different, and it requires much more drastic action.”

Taleb’s book was published in May 2007, about three months before the credit crunch led banks to announce writedowns and credit losses that now total more than $1 trillion.

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 bullet-proof investors from market slumps while profiting from rallies.

He now advises Universa Investments LP, a Santa Monica, California-based firm opened in 2007 by Mark Spitznagel, Taleb’s former trading partner, using some of the same strategies they had used since 1999. Taleb also is professor of risk engineering at New York University.

Financial stocks in the Standard & Poor’s 500 Index tumbled 57 percent last year and are down 43 percent this year for the worst performance among 10 industry groups. The broader index fell 3.5 percent today to the lowest since April 1997, extending this year’s retreat to 18 percent.

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