Guest Lecture Courant 02-08-11 - Risk Economics …riskecon.com/wp-content/uploads/2012/10/NABE-2012-Big...CaseinPoint:CorrespondencesBetweenBusiness Conditions,Unemployment,andInsuranceclaims

NABE�Annual�Meeting: October�13�16,�2012Bridging�the�Gap�Between�Finance�and�the�Real�Economy�

Computational�Economics�and�Big�Data:�How�Technology��s��Transforming�Business�Decision�Making

David K.A. MordecaiRisk Economics, Inc.

1 Copyright ©2012 Risk Economics, Inc.

Computational��conomics

• An�emergent algorithmic�paradigm�involving�– distributed�

social– social– adaptive– procedurally�rational�(learning,�search),�and�

inherently Bayesian inference– inherently�Bayesian�inference

• Generative�social�simulation�re:�carrying�capacity�and�complexityResource competition cooperation and CPRs (common pool resources)– Resource�competition,�cooperation,�and�CPRs�(common�pool�resources)

• e.g.�liquidity,�credit�• Sustainability,�fragility,�stability• Neo�institutional�in�nature• Hebbian learning,�search,�and�complexity• Interactions�between�heterogeneous,�autonomous�agents�(Neo�Keynesian?)• Sparsity�vs.�parsimony


Seminal�Trends

• Pervasive,�mobile�adaptive�social�computing�and�sensing– Urbanization– Rental/leasing�markets

• Service�flows�vs.�Ownership�(asset�stocks)• Co�location�and�microtransactions

• Fundamental�changes�in�commerce�and�finance– consumer�credit�and�insurance

• Payment�systems�and�ecurrency (e.g.�Bitcoin)


Emergent�Institutional�and�Market�Determinants

• Monopolistic�Competition– Supply/Demand�elasticities– Dominant�oligopolies�with�competitive�fringe– Market�contestability

• Microstructure• Auctions�and�(real)�options�“imbedded�everywhere”�(ubiquitous,�pervasive)• Herds,�fads,�fashions�(social�contagion�and�cultural�propagation;�norms)• Curated life�experiences,�events�trajectories• CPRs�and�network�externalities• Lock�in and�path�dependence�(increasing�returns)

– Product�liability�and�warranty�(legal,�insurance)�implicationsE id i l i t l t i l• Epidemiology,�environmental�toxicology

• Evidentiary�(discovery,�causation,�liability�rules,�damages,�etc.)


Tools�and�Methodologies

• Data�Science– Scalable�Bayesian�inference�(with�sparsity)

ll l– Large� vs.�small� samples– Spatio�temporal�dynamics– Unstructured�data

• Crowdsourcing,�Machine�Learning,�Agent�Based�Models– Coordination�and�mechanism�design– Experimental�economics– Activity�Recognition– Social�network�analysis�(peer�effects)y (p )– Discrete�choice�and�hedonic�pricing�(e.g.�market�baskets�re:�

preferences,�utilities,�elasticities)


Copyright�©�2011�Risk�Economics,�Inc. 12

Urbanization�will�result�in�changing�dynamics�(e.g.�unemployment,�crime)6 Copyright ©2012 Risk Economics, Inc.

Agent�Based�Modelling

�

Realistic�“ground�up”�models�of��real�world�strategic�interactions,�structural�shifts,�and�complex�evolving�dynamics��


Demographics,�Sociometrics and�Psychometrics�matter

��

Actively�monitoring�consumer�behavior,�lifestyle�choices,�and�aggregated�preferences�at�the�right�level�of�granularity�can�be�predictive�of�both�short� and�long�tailed�loss�development.


Is there an Analogue for Casualty Underwriting?

Source:�Deloitte�Consulting


Case�in�Point:�Correspondences�Between�Business�Conditions,�Unemployment,�and�Insurance�claims

��

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

200

300

400

500

600

700

800

900

1000

10/00

04/01

10/01

04/02

10/02

04/03

10/03

04/04

10/04

04/05

10/05

04/06

09/06

03/07

09/07

03/08

09/08

03/09

09/09

03/10

09/10

Graph�1:�Initial�Claims�vs�Continuing�Claims

RecessionsInitial�ClaimsInitial�Claims�4Wk�MAContinuing�ClaimsCont�Claims�4Wk�MA

250

300

350

400

450

500

550

600

650

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100

104

Graph�2:�Initial�Claims��(000s)

Current Expansion 2001 Expansion1991 Expansion 1982 Expansion1975 Expansion

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100

104

Graph�3:�Continuing�Claims��(000s)

For�example,�there�are�currently�unexploited�techniques�for�analyzing�statistical�relationships�between�changing�unemployment�insurance�claims�relative�to�workers�compensation�and�disability�claims.�

Source:�NBER,�ETA�and�Risk�EconomicsTM calculations10 Copyright ©2012 Risk Economics, Inc.

Disability�versus�Earnings��

��

Relative�earnings�of�permanent�partial�disability�claimants�as�a�proportion�of�earnings�of�comparison�workers�in�five�states

SOURCE:�Robert T.�Reville,�Leslie I.�Boden,�Jeffrey E.�Biddle,�and�Christopher�Mardesich,�An�Evaluation�of�New�Mexico�Workers'�Compensation�Permanent�Partial�Disability�and�Return�to�Work,�MR�1414�ICJ�(Santa�Monica,�CA:�RAND�Institute�for�Civil�Justice,�2001)

What�this�graph�does�not�tell�you�is�that�disability�claims�increase�during�periods�of�high�unemployment,�i.e.�poor�business�conditions.�In�other�words,�disability�and�workers�compensation�may�be�serving�as�a�substitutes�or�supplements�to�unemployment�insurance.

Question:�what�specific�industry�and�occupational�characteristics�may�be�predictive?


Socio�Informatics:�Network�Analysis,�Data�Mining�and�Text�Mining

� 31

These�analytic�methods�are�applicable�to�many�risks:�Energy�and�power�and�natural�resource�markets;�Social�systems�and�integrated�modeling�of�interactions�between�natural�and�social�processes;�national�security�topics,�e.g.�distributed�adaptive�network�control�and�terrorist�networks;�supply�chain�dynamics;�biological�systems,�including�pandemics;�industrial�and�macroeconomic�structures�(trade�and�capital�flows);�other�geopolitical,�socioeconomic,�legislative,�regulatory,�commercial,�financial�market�and�policy�issues.

Source:�CI�Chicago


Text�Mining�has�Forensic�Implications�for�Tort,�Litigation,�and�Claims�Settlement


`

The Federal Reserve Bank of New York, November, 2009

Short-Term Funding Short- to Long-Term Cash

MMDAs

Households, Businesses, Governments CDs

Equity Funding Long-Term Investments

Equity Equity

`

Equity

Short-Term Debt InstrumentsRegulated Money Market Unregulated Money Market

Agency MBS Agency Discount Notes Intermediaries Intermediaries

*Conforming mortgages RRs

Other*

Liquidity Puts A1 *ARS, MMMFs

A1 CP

AAA ABCP

AA-BBB BDP

Equity RRs

*Conforming student loans 2a-7 MMMFs Other*

A1 *ARS, MMMFs, as well as A1

A1 (AAA) ABS Tranches CP MTNs and term ABS CP

A1 ABCP ABCP

AAA BDP BDP

AA-BBB RRs RRs Short-Term Savings

Equity Other* Other*

*Conforming SBA loans *TOBs and VRDOs A1 *ARS, MMMFs Money Market Portfolios

CP

ABCP

BDP

RRs

Other*

A1 AAA Offshore (non-2a-7) MMMFs *ARS, MMMFs, as well as A1

AAA AA-BBB A1 MTNs and term ABS CP

ABCP AA-BBB LTD MTNs CP ABCP

Equity Repo Equity Supers CNs* ABCP BDP

LTD Haircuts BDP RRs

Households Equity O/C High-Yield CLOs RRs Ultra-Short Bond Funds Other* Households and Nonprofits

(LBO Loans) Other* A1 *MMMFs

A1 *TOBs and VRDOs CP

AAA ABCP

AA-BBB BDP

2nd Lien Equity RRs

Equity O/C O/C O/C Other*CP *FHC affiliate Consumer ABS *ARS, MMMFs, as well as A1

ABCP (Credit Card ABS) MTNs and term ABS CPBDP A1 ABCP

AAA BDP

AA-BBB RRs

Equity O/C Equity Other* Nonfinancial Corporates

O/C *ARS, MMMFs

an Banks

DW

AAA TAF

AA-BBB FX Swaps

LTD MTNs TSLF

Supers CNs* Federal, State TSLF

Nonfinancial Businesses Equity Tri-Party Clearing Banks* and Local Governments PDCF

CPFF

TALF

AMLF

MMIFF

ML, LLC

Equity O/C O/C an Banks ML II, LLC

*BoNY and JP Morgan Chase ML III, LLC

LSAPs

RoW

O/C Equity (Foreign Central Banks) Equity

RMBS

(1st lien, private label) MTNs Cash Reinvestment AccountsCP A1 A1

ABCP AAA CPBDP AA-BBB ABCP

Equity BDP RoW

Governments RRs (Sovereign Wealth Funds)

Equity O/C Subprime ABS Other* *Done by custodian banks

(2nd lien, subprime, HELOCs) Trading Book *MMMFs, MTNs, term ABS and on an agent basis.

A1 TOBs and VRDOs

AAA

AA-BBB

Equity

Haircuts Cash Reinvestment Accounts *Issued to central banks

CMBS and High-Yield CLOs A1 in exchange for investibe FX

(LBO Loans) CP Long-Term Savings

A1 ABCP

AAA BDP Fixed Income Portfolios*

AA-BBB RRs

Equity Equity Other* *Done by real money accounts

*MMMFs, MTNs, term ABS and on a principal basis.

TOBs and VRDOs CNs

*Bank, Shadow Bank

and Corporate Debt

Consumer ABS

(Card, Auto, Student Loan)

CP A1

AAA Cash

AA-BBB MTNs

Equity LTD Equity Portfolios*

Haircuts Equity

Equity O/C Other ABS

(Floorplan, Equipment, Fleets)

A1 AAA *Mutual Funds, ETFs, Separate Accounts

AAA AA-BBB *Bank and Corporate Debt

AA-BBB MTNs

Equity CNs*

O/C

CP Middle-Market CLOs

ABCP (Loans to SMEs) Cash

`

LTD AA-BBB Equity

Equity Equity Equity

*Term ABS and CDO

debt and equity tranches

Public Equity

Cash

MTNs

LTD

Structured Credit Equity

Equity

*Hedge Funds and Private Equity

(only credit exposures)

TSLF/Maiden Lane LLC

3/11/08 and 3/16/08, respectively

Portfolio Protection*

EquityHouseholds, Businesses, Governments

Households, Businesses, Governments Equity and the Rest of the World (RoW)

Equity

AA-BBBEquity Equity

Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))

Debt

Tri-Party Repo System

Sub-

prime

ABS

Commercial Bank*

Step (7): Wholesale Funding

(Shadow Bank "Depositors")

ABS Reserves ABCP

Equity

Counterparty Hedges

Synthetic Credit Liabilities

Counterparty Hedges

3/11/08 and 3/24/2008, respectively 11/10/2008

*Funded by UST's $50 billion

No

Explicit

Fees

GSEs, DoE, SBA Federal Government

Agency Debt PurchasesAgency MBS Purchases

Funded Synthetic CDOs*

Consumers

Finance Company*

Fannie and Freddie*

Credit Hedge Funds

Conceptualized, designed and created by Zoltan Pozsar ([email protected])

Debt

Insu-

rance

TLGP

Warehouse Hedges

Counterparty Hedges

Protec-

tion Sold

Insurance

Guarantees

Step (4): ABS Warehousing

Finance Company*

The "Synthetic" Shadow Banking System

Broker-Dealers*

Wh

ole

sale

Fu

nd

ing

(Ter

m D

ebt

Fun

din

g)

Long-Term Synthetic Liabilities Broker-dealer CVA desks, ABS pipeline hedges,

Warehouse Hedges

Single-Name and Index

CDS Indices

Single-Name and Index

Assets Bond(s)

Sovereign CDS

Proprietary trading desks, credit hedge funds, etc.

Term

Savings

Commercial Banks

AA-BBB

Synthetic Exposures*

Counterparty Risks*Credit

Bets

Term

Savings

Hedgers*

(Credit-Linked Notes)

Deposits

Bank Equity

Real Money Accounts*

Equity Portfolios

Money Market "Portfolios"

Loans

Th

e T

rad

itio

nal

Ban

kin

g S

yst

em

("O

rigin

ate-

to-H

old

-to

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uri

ty-a

nd

-Fun

d-w

ith

-Dep

osi

ts")

unfunded liabilities, etc.

Loans,

ABS

and

CDOs

Unfunded

Protection

Referencing ABS and single-name CDS *Referencing single-name CDS indices, etc. *Inability to meet

Treasurys

indices, etc.

CDS

AAA AAAAAA

[…]

Equity

Loan(s)

Structured Credit and Loan

negative basis traders, real money accounts, etc.

Speculators*

Unfunded

Protec-

tionProtec-

tion Sold

*Market Makers

Funded

Protec-

tion

"Naked"

Positions

Funded

Protection

HedgesFunded

Protectio

n*Referencing corporate loan indices, etc.

*Hedging Motives

Insured

Assets

*Speculative Motives

Warehouse Hedges

Loans,

ABS

and

CDOs

Unfunded Synthetic CDOs*

Protec-

tion

Bought

Ultimate Creditors

Bond(s) CDS

Unfunded

Protec-

tionProtec-

tion Sold

[…]

Warehouse Hedges

Pri

vate

Ris

k R

ep

osi

tori

es

Th

e "

Syn

theti

c"

Sh

ad

ow

Ban

kin

g S

yst

em

(Der

ivat

ives

-Bas

ed R

isk R

epo

sito

ries

)

CDS Counterparty Hedges

Funded

Protection

Ultimate Borrowers Corporate CDS CDPCs CPDOs* Short-Term Synthetic Liabilities

Warehouse Hedges Warehouse and

Counterparty Hedges

AAALoans,

ABS

and

CDOs

9/19/2008 10/21/2008

Reserves

ABCP

10/7/2008 11/25/2008 10/11/2008 12/12/2007 12/12/2007

Tri-Party

CollateralReserves Reserves

Non-

repo

MMS

Reserves$ FX

CP

Reserves AAA Reserves

Wareho-

used

ABS

Reserves

CDS

on

CDOs

Reserves

CPFF TALF Maiden Lane III LLC TAF FX Swaps TSLF/PDCF

Equity Equity

Pri

vate

Cre

dit

Tra

nsf

orm

ati

on

(Tai

l R

isk A

bso

rpti

on

)

Pro

vis

ion

of

Ris

k C

ap

ital

Pri

vate

Ris

k R

ep

osi

tori

es

*Unaffiliated with originators!

Credit Insurance

(Mortgage Insurers)

Cre

dit

Hed

ges

Premia

Credit

Insurance Premia

Credit

Insurance Premia

Credit

InsuranceClient

Funds

Cre

dit

"R

efe

ren

ces"

Mortgage Insurers* Monoline Insurers*

*Unaffiliated with originators! *Unaffiliated with originators!

MTNs

Fed

eral

Res

po

nse

s

(S

had

ow

Ban

k B

acks

tops)

Equity

TranchesMezz

ABS

Super

Senior

Credit Insurance Credit Insurance

[…]

MTNs

LTD

and Life and P&C Insurance Companies

Loans

AAA

(A4)

*Public and Private Pension Funds,

Debt

Tranches

Pension Funds, Insurance Companies*

Structured Credit Portfolios*

Term

SavingsHG

ABS

Super

Senior

Structure

d Credit

Credit Insurance

(Monolines)

A4 and AA-BBB ABS Tranches

AAA

Diversified Insurance Co.

LPFCs

Client

Funds

Long-Term Debt

Alternative Asset Managers*

Pension

Liabilities

Captive Finance Company *Capital Notes

Loans

AA-BBBREITs

BDP

MTN

*Independent conduit

Industrial Loan Company*

A1

Loans ABCP Loans

CP

LTD

Th

e "

Ex

tern

al"

Sh

ad

ow

Ban

kin

g S

yst

em

(In

dep

end

ent

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ecia

lists

: O

rigin

ate-

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un

d M

od

el |

DB

Ds:

Ori

gin

ate-

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istr

ibu

te M

od

el)

Repos

Off

-Bal

ance

Sh

eet

Equity Liquidity Puts*

A2 & A3 (AAA) ABS Tranches

Public

Equity

Term

SavingsABS

Agency

LTD

Structure

d Credit

Long-Term Instruments (LTD)

Cash

Collateral

ABCP

Loans ABCP

MTNs LoansPrivate

LTD

AA-BBB

*Broker-dealer affiliate *ARSs, TOBs, VRDOs *Medium-term debt

Ind

ep

en

den

t S

pecia

list

s' C

red

it I

nte

rmed

iati

on

Pro

cess

Standalone Finance Company Credit Hedge Fund

Loans

Loans

*Finance company affiliate

[…]

Term

Savings

Cash

Collateral

Securities Lending*

Agency Debt*

Wh

ole

sale

Fu

nd

ing

(Med

ium

-Ter

m F

un

din

g)

Securities

Lent

LoansAAA

(A2-A3)

Cash

Collateral

Securities

Lent

Loans

Long-

Term

Munis

Short-

Term

Munis

LoansAgency

DebtABS

Industrial Loan Company* AAA

Local Governments

Loans

Brokered

Deposits

AA-BBB

Tax

Revenues

Muni

Bonds

Brokered

Deposits

Brokerage

Clients'

Cash

Balances

FX

ReservesBonds*Mezzanine CDOs Super

Seniors

Principal Securities Lending

BBB

Supers

*Broker-dealer affiliate

Savings:

Export

Revenue

"Equity"

Tax

Revenues

State

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*Broker-dealer affiliate AA-BBB

Loans AA-BBB Repos

Equity

Asset Manager,Off

-Bal

ance

Sh

eet

Tax

RevenuesBonds

State Governments AAA Prime Broker

Super

SeniorsRepos

Loans

Securities Lending*

Supers

Private

MTNs Cash

CollateralLoans ABCP AA-BBB ABS

High-Grade CDOs

Federal Government

Tax

Revenues

Treasury

Bonds

Credit Hedge Fund*

Broker-Dealer*

Loans Repos

MTNs*Broker-dealer affiliate

AAA

OMO

Collateral

Savings:

FX

Reserves

Local

Currency

Single-Seller Conduit

DB

Ds'

Cre

dit

In

term

ed

iati

on

Pro

cess

Medium-Term Instruments Agent Securities Lending

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AA-A

AA-BBB

Private Equity

Euro

Deposits

Portfolio Companies

Firms

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LBO

Loans

*European bank affiliated

AAA

ABCP

Arbitrage Conduit

Assets

LoansBusinesses

Reverse

ReposCRE

CRE

LoansLoans

Bonds

Europe

AA-BBB

Businesses Europe

Savings:

Excess

Cash

"Equity"

Federal Reserve

Invest-

ments

C&I

Loans

[…]

Euro

Deposits

Reserves

"Equity"

Wh

ole

sale

Fu

nd

ing

(Over

nig

ht

Fun

din

g)

Mezz

ABS

Mezz

CDO

ABS

Collateral

Eu

rop

ean

Ban

ks'

Sh

ad

ow

Ban

kin

g A

cti

vit

es

Cash lending

for

securities collateral

Mezz

CDO

Th

e "

Inte

rnal"

Sh

ad

ow

Ban

kin

g S

yst

em

(Pri

vat

e O

rigin

ate-

to-D

istr

ibu

te M

od

el)

CP

ABCP

*FHC affiliate *ARSs, TOBs, VRDOs

Multi-Seller Conduit*

Goods

&

Services

Loans Loans AA-BBB ABCP

LoansMTNs

Sweep Accounts

Long-

Term

Munis

Loans ABCP

Equity Liquidity Puts*

Off

-Bal

ance

Sh

eet

AA-BBB

Reverse

Repos*ABCP

EquityAAA

Off

-Bal

ance

Sh

eet

ABCPMezzanine CDOs

BBB

Supers

AAA

*FHC affiliate

"Equity"

ABS

$1 NAV

SharesBDPs

BDPs

Loans

AssetsLoans

*FHC affiliate

ABCPHome1st Lien

Subprime Homeowners

$1 NAV

Shares

AA-BBB Loans CP$1 NAV

Shares$1 NAV

SharesHigh-Grade CDOs

AA-A

Supers *Capital Notes

$1 NAV

Shares

SIV, SIV-Lite

Off

-Bal

ance

Sh

eet

Home1st Lien Loans

Dollar

DepositsLoans

Securities

$1 NAV

Shares

Direct

InvestmeShort-

Term

Savings

FH

Cs'

Cre

dit

In

term

ed

iati

on

Pro

cess

$1 NAV

Shares

Repos

CP

Loans

ABCP

AA-BBB

(Retained Portfolios)

Loans*

Agency

MBS

Discount

NotesLoans A1

Private

ABS

Agency

Debt

SBA ABS

ARSs

TOBs

or

VRDOs

FFELP ABS

Private

ABS

Agency

Debt

(Retained Portfolios)

Off

-Bal

ance

Sh

eet

ABS

ABS

FH LBs Fannie and Freddie Cash "Plus" Funds

Agency

Bills

Th

e G

overn

men

t-S

po

nso

red

Sh

ad

ow

Ban

kin

g S

yst

em

(Pub

lic O

rigin

ate-

to-D

istr

ibu

te M

od

el)

Enhanced Cash Funds

$1 NAV

Shares

MunisDiscount

Notes

Off

-Bal

ance

Sh

eet

Ultimate Borrowers CMOs Direct Money Market Investors Ultimate Creditors

Loans*

Agency

Pass-

Through

Agency

MBS

CMO

Tranches

Fed

eral

Res

po

nse

s

(S

had

ow

Ban

k B

acks

top

s)

Insurance

Premia

Deposit

Insurance

Off -Balance Sheet

ABS Intermediation

On -Balance Sheet

ABS Intermediation

Th

e G

SE

s' C

red

it I

nte

rmed

iati

on

Pro

cess

FHLBs

(Time-Tranched Agency MBS)

Federal Government

Agency

MBS

The "Cash" Shadow Banking System Deposit Insurance

(FDIC)

Liability Insurance

(Federal Government)

Credit Insurance

(GSEs, DoE, SBA)

Liability Insurance

(Federal Government)

Liability Insurance

(EU Government)

11/25/2008

Agency

MBSReserves

Deposit Insurance

(FDIC)

MMMF

Insurance

Agency Debt Purchases

Pu

bli

c R

isk

Rep

osi

tori

es

Pu

bli

c C

red

it T

ran

sfo

rmati

on

(Tai

l R

isk A

bso

rpti

on

)

European Sovereign and

Quasi-Sovereign States

Bank

Equity

FDIC

No

Explicit

Fees

No

Explicit

Fees

Implicit

Insurance

Federal Government

11/25/2008

Temporary PBGC

Pension Funds

Client

Funds

Dollar

Deposits

Eq

uit

y F

un

din

g

Agency

DebtReserves

Discount Window

Loan

Collateral

Agency

DebtReserves

Term

Savings

*Asset Managers, Insurance Companies and

Bank

Equity

LGIPs

Loans

Exchange Stabilization Fund

$1 NAV

Shares

Insurance

Premia

Pu

bli

c R

isk

Rep

osi

tori

es

(Tai

l R

isk A

bso

rpti

on

)

Corporate Treasurers

A1

CP

Households, Businesses

Checking

Account

and the Rest of the World

Equity

Asset Managers*

Bank Treasurers

Bank

Equity

$1 NAV

Shares

Savings:

Excess

Cash

Savings:

Excess

Cash

The Traditional Banking System

CDs

Ultimate CreditorsDepositors

Deposits

Step (1): Loan Origination

TBA

Market

Step (3): ABS Issuance

Short-

Term

Savings

Implicit

Insurance

9/18/2008

MMMF Guarantee

Loans

Ultimate Borrowers

Reserves

11/25/2008

No

Explicit

Fees

Implicit

Insurance

Deb

t F

un

din

g

(Sh

ort

an

d L

on

g-T

erm

Dep

osi

ts

Implicit

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Step (5): ABS CDO Issuance

Loans*

(ABS Warehouse Conduits)

Structuring

and

Syndication


(Warehouse and Term)

Loans ABCP

(Warehouse and Term)

Loans

Loans

Brokered

DepositsAAA

Loans

Discount

Notes

Step (2): Loan Warehousing

Agency

Debt

Equity

Structuring

and

Syndication

Loans

Subprime, RMBS, CMBS

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ABS

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*FHC affiliated

Short-

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*Capital Notes

Maiden Lane II LLCMMIFFAMLF

Trading Books

Catalogue:,

Shadow Bank LiabilitiesStep (6): ABS "Intermediation"

Trading Books

Repo Conduits

ABCP

CDOs

Loans

Bonds

Assets

"Prime" Homeowners

*DBD affiliate

Loans


Multi-Seller Conduit* Broker-Dealer*

Multi-Seller Conduit*

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Loans

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Broker Sweep Accounts


ABS

and

CDO

Equity

Loans

ABS

Loans

ABS

Equity

Hybrid Conduits

ABCP

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mailto:[email protected]





Cross-Border Financial Surveillance: A Network Perspective (IMF Working Paper 105 , April 2010 ) by Marco Espinosa-Vega and Juan Sole


A network analysis of global banking:1978-2009 (April 2011) by Camelia Minoiu and Javier A. Reyes

Does “God” Play With Fuzzy Dice?A stochastic game is a dynamic game played by one or more players with probabilistic transitions, such that at each stage

the probability distribution for that new random state depends on the previous state and the actions chosen by the players

Representation of a finite-state machine (example): an FSM that determines whether a binary number has an odd or even number of0’s. FSM can be non-deterministic (i.e. stochastic). Also state machines can be infinite (i.e. continuous)

on the previous state and the actions chosen by the players

Probabilistic parameters of a Hidden Markov model What if certain parameters (example of the simplest dynamic Bayesian framework):x states, y possible observations;a state transition probabilities, b output probabilities

f p(e.g. transition states) are fuzzy, time-varying, etc.?

Model underlying the Kalman filter. Squares represent matrices. Ellipses represent multivariate normal distributions (with the mean and covariance matrix enclosed). Unenclosed values are vectors. In the simpleUnenclosed values are vectors. In the simplecase, the various matrices are constant with time, and thus the subscripts are dropped, but the Kalman filter allows any of them to change each time step 0


A stochastic game is a dynamic game played by one or more players with probabilistic transitions, such that at each stage

g y g p y yp y p g

the probability distribution for that new random state dependsp y f pthe previous state and the actions chosen by the playersthe previous state and the actions chosen by the players

Bayesian Graphical Models

A Bayesian network is a probabilistic graphical model that represents a set of random variables and their conditional d d i i di t d li h (DAG)dependencies via a directed acyclic graph (DAG).

Bayesian networks that model sequences of variables are called dynamic Bayesian networks. Generalized Bayesian networks that can represent and solve decision problems under uncertainty by combining probabilistic inference and utility maximization are called decision networks,

l d fl d Effi irelevance diagrams, or influence diagrams. Efficientalgorithms exist that perform inference and learning in Bayesian networks.

A Markov random field (“MRF”), Markov network or undirected graphical model: a graphical model in which a set of Markov random variables are described by an undirected graph and is similar to a Bayesian network in its representation of dependencies An MRF canvariables are described by an undirected graph, and is similar to a Bayesian network in its representation of dependencies. An MRF canrepresent certain dependencies that a Bayesian network cannot (such as cyclic dependencies), but cannot represent certain dependenciesthat a Bayesian network can (e.g. induced dependencies). The classic MRF is the Ising model a statistical model of ferromagnetism

A log-linear model is a Markov random field with feature functions fk such that the full-joint distribution can be written as shown with partition function z, and where Xis the set of possible assignments of values to all the network's random variables


A Markov random field (“MRF”), Markov network or undirected graphical model:

Generalized Bayesiany y ynetworks that can represent and solve decision problemsp punder uncertainty by combining probabilistic inferencey y g pand utility maximization are called decision networks,y

l d fl drelevance diagramsdd , or infln uence diagramsdd

A Bayesian network

Risk Economics, Inc.www.riskecon.com

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• The�RiskEcon™�litigation�practice�also�provides�advisory�services�and testimonial�expertise�on�complex�issues�related�to�financial�instrument�valuation�models�and�frameworks,�market�and�industry�standards�and practices�for�the�financing,�risk�management,�active�trading,�and hedging�of�OTC�derivatives�and�structured�products.

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