Saturday, October 15, 2011

Corrections to "Engineering the Crisis"

We note in the introduction to the book Max Weber's rueful acknowledgement (in "Science as a Vocation") that empirical claims are bound to be superseded over time. We hope it takes more than a day or two for our claims to be superseded, but we are happy to contribute to the process and we invite others to help. Today is October 15, the release date of the book. Let's see how long any of our claims remain standing!

Juliusz Jablecki, formerly an economist at the central bank of Poland, points out an error in our discussion of AIG. AIG's inability to cover its CDS contracts was, as far as we know, the one case in which the CDS "insurance" system failed to work during the crisis. However, it was a major case. We contend on p. 33 that once AIG was bailed out on September 16, 2008, its CDS "were a nonissue in the interbank panic that was underway." Juliusz points out, first of all, that the AIG "bailout" was actually a collateralized line of credit from the Fed. More important, however, CDS on AIG (i.e., not CDS to which AIG was a counterparty, but CDS insuring against AIG's default), after falling precipitously after September 16, spiked again in November 2008 and even higher in April 2009. So concerns about AIG's ability to make good to its counterparties may well have been an ongoing contributor to the financial crisis, contrary to our claim. Thank you, Juliusz.

Here is an important typo on p. 76, 2/3 down page: should read "the spread for agency bonds was 0.04 percent," i.e., 4 bps, not "0.4 percent," or 40 bps.

Finally, we somehow picked up the notion that creditors of Long-Term Capital Management (LTCM) were not bailed out in 1998 (p. 58). This is wrong: they were bailed out.

We apologize for the errors.

--Jeffrey Friedman and Wladimir Kraus

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