Black swans and the credit crisis

The Black Swan

From the book

A Black Swan is a highly improbable event with three principal characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random and more predictable than it actually was. Google was a black swan, so was 9/11.

Arguably, the current and still developing credit crisis is a black swan. Looking backwards, it seems so obvious it had to happen, but hardly anyone saw it coming. Now it’s metastasizing far beyond what most thought could happen, another black swan characteristic.

Consider Sentinel Management Group

The announcement that [Sentinel] has asked the Commodity Futures Trading Commission for permission to suspend redemption has potentially huge implications.

Sentinel operates in the niche business of holding the excess cash—over normal margin requirements—for futures market participants, including hedge funds, futures brokers, commodity trading advisors, and similar entities. The inability of Sentinel’s customers to access their cash balances could have, at best, interesting implications if those traders cannot meet margin calls.

Hello, cash balances in brokerage accounts are at risk now?

While Sentinel is barely a pimple on the wider money-market world, and in the overall scheme of things insignificant in the futures markets, it operates in a specialized niche where the consequences of its failure may spread out of all proportion to its size.

That’s what I mean by “metasticizing.”

PS The CFTC replied, saying they do not have the authority to grant Sentinel’s request.