Sunday, November 23, 2008

Guess who said this and when?

When I accepted the invitation to address you, I looked forward to the opportunity to reflect upon the nearly 30 years of the Federal Reserve Bank of New York's involvement in the securities lending business. I thought it would be interesting and useful to address the changes in our securities lending business, the changes we are now planning for our lending operations, and the changes in securities markets over these decades that have made the securities lending business so important to the efficient functioning of our capital markets. However, given the excitement we have all recently been experiencing, I thought it might be somewhat more interesting if instead I focused my remarks more broadly on the extraordinary events in credit markets over the last 60 days and the lessons we are all learning -- once again.
First, we have learned again that markets depend on confidence, not just in the economic outlook of a firm or a country, but confidence in a core set of assumptions about how creditors and debtors will behave.

Second, we have learned another lesson about the "commoditization" of risk.

Third, we have learned again the importance of stress testing as a risk management discipline, of the importance of going beyond value-at-risk estimates based on recent historic data.

Fourth, we have learned once again that lending with no initial or minimum haircut -- no minimum excess collateral -- is not without risks.

And finally, we are learning right now about the difference between risk appetites and risk management.
In suggesting that we are learning these lessons over again, I don't think we should be too embarrassed. Everyone who works for me at the New York Fed knows that I am fond of passing along a saying that my Uncle Leonard picked up from one of his professors years ago that, "the secret of education is redundancy -- and you can say that again." My uncle also recently reminded me of the story of the man who was asked if he had learned from his mistakes. "Yes" he replied, "I have learned from my mistakes and now I can repeat them exactly."

Who said this and when? For the answer, go here. (Hat tip to

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