Swiss Doctoral Workshop in Finance, Darrell Duffie and SoFiE

wordup will be on the road next week beginning Monday with a visit to the Swiss Doctoral Workshop in Finance, held near Bern. I will then move on to Geneva for a presentation by Darrell Duffie before joining the opening of the second Society for Financial Econometrics conference, also in Geneva.

The Doctoral Workshop (image, left) assembles graduate students from top finance research schools throughout Switzerland and places them before an academic audience from around the world. The venue, Study Center Gerzensee, is run by the Swiss National Bank. And run very well, I must say.

In the past, this meeting has been a great chance to learn what finance researchers really think is going on in the economy and I am sure this year will not be an exception to this.

Having won a Swiss finance prize in 2008, Stanford Professor of Finance Darrell Duffie will give an acceptance presentation entitled "Policy Issues Facing the Market for Credit Derivatives" on Tuesday evening at the Société de Lecture, Geneva. I've been in touch with Darrell and among the various themes he promised to talk about will be a precise explanation of the dramatic kinetics of last year's bank failures.

I will then be taking a brief break to visit a long time friend Dr Daniele Pralong in a small town on lake Geneva. When I met Daniele at Oxford 15 years ago I would not have imagined that either of us would living be in Switzerland today, and certainly not both of us at the same time. But having arrived here earlier in the year from her most recent address in Washington DC it seems we will now be separated by a mere train ride. Great news for wordup given the better access Daniele's broad knowledge of bio-medical research.

I invite you to follow all the action here, via twitter. And I hope to coax a few words from doctoral students here using a Google's Friends Connect platform I installed for them a few weeks ago.

There are risks. You have to think about them.

Economists have predicted 10 out of the last 5 recessions. Jokes aside, economic prediction is beset with false alarms and missed warnings these days, so why should we get excited about the author of the 2006 business best seller "The Crash is Coming", Max Otte?

Professor Otte, Worms Technical University, Germany (pictured, middle) and Kanwardeep Ahluwalia, Swiss Re (right) led the discussion at this evening's Swiss Re's Centre for Global Dialogue Risk Talk on forecasting the next crisis.

Otte seems to have been spot on with his 2005 prediction of a 'financial tsunami in 2008 and certainly before 2010'. But why should we have believed him at the time?

His reasoning was based on 'very simple measures' of total debt versus gross domestic product in the US, and the fact that indexes like the Dow were rising much faster than measures of real wealth.

But the simplicity of Otte's analysis masks what is perhaps a deeper level to his thinking. After all, relatively few people predicted this financial crisis. His ideas met with a significant headwind at the time. And his ideas where not the product of complex risk models. Quite the opposite, in fact.

"You can't simply put a number on risks,' Otte explained during the discussion at the end of the presentation this evening. Earlier he had expressed a certain cynicism towards the goal of precisely quantifying risk. In a jibe towards the widely used risk model Value at Risk, Otte questioned how any organization could rely so strongly on the assumption that past volatility alone could predict a company's future risk exposure.

Physicist Dr Ahluwalia shared some interesting insights from his final days at investment bank Bear Stearns. Luck or otherwise, Ahluwalia resigned exactly one day before the company's 'fatal liquidity problem' in March 2008.

"People were not confident to enforce the risk measures that were already in place," explained Ahluwalia. Here again we see that the problem is not simply a flaw in financial risk models. The problem concerns the limits to the very application of these models to risk management.

And that is what I think distinguishes Professor Otte from the crowd. "One needs to go back to first principles and ask when will the model itself break?"

"There are risks. You have to think about them," he said.

Boost to European public-private medical research

While skeptical about green shoots in the financial sector, I am happy to herald upbeat news that the EU is pledging more than 240 million euros towards a drug research project involving leading European pharmaceutical companies, academic research institutes and a handful of biotechnology companies.

Back in 2006 I worked for a research software company called Genedata (known affectionately as the University of Genedata, pictured left). The company had a deal to work with 15 European pharmaceutical companies (basically, all the major ones) to develop quantitative tools for predicting drug safety on the basis of whole-genome toxicology findings.

The pharmaceutical industry stumps up about a fifth of the world commercial research and development budget and Big Pharma in Europe contributes generously towards Europe's trade surplus in the technology sector (still very healthy in 2008).

So it is great to see convincingly green shoots!

Is trading success all in the numbers?

I guess I'm not the only one wondering if private trading has been rendered all but impossible by the current market volatility. What is the point of me carefully building a portfolio when the entire market can be blind-sided by a single media report and placed on an entirely new trajectory?

Lately, my long time friend and former research colleague Dr Alessandro Usseglio Viretta has been applying his considerable mathematical talents to this very problem. He is using a form of machine learning known as Support Vector Machines (SVM) to perform a complex analysis of the market in real time.

SVM works by classifying stocks into simple categories, for example ‘buy’ versus ‘avoid’, on the basis of reams of market data. But while the predictions of the algorithm are straightforward, the stock picking rules created by SVM are feverishly complex. Every piece of market data chosen for inclusion in a SVM analysis is carefully factored into the final trading strategy. “It really matters what you choose to put in the model,” explains Alessandro.

Alessandro has developed a platform able to perform SVM on timescales of minutes and even seconds. This is crucial for participation in markets such as foreign exchange, not to mention volatile equity markets. “That is where high frequency trading comes in,” comments Alessandro. And note that the New York Stock Exchange has recently introduced a fee structure that is more accommodating to high frequency traders.

With an intellectual rigor befitting his early graduate physics work at CERN, and professional verve reflecting his recent collaborations with quant financial services provider Oliver Wyman, it is not surprising that traders are coming forward to test their strategies using Alessandro’s computational tools.

But in the end, will it work? “I’m doing the math, but the important thing to realize is that I am collaborating with experienced traders,” explains Alessandro. “Together, we’re in with a good chance”.

Finance research moving up the Swiss charts

Where does finance research and education fit into the response to the 2008 financial crisis? I remember studying carefully the Swiss Bankers Association dossier on the "Financial Master Plan 2015", in 2007, and finding very little about finance education (although the associated press release placed education at the top of the list of future priorities in Swiss banking).

Swiss banking expert Claude Baumann (pictured right speaking with JPMorgan's Jes Staley at a finance research conference last year) placed finance research in the top position in a recent "wake up" call for Switzerland's banking and finance community.

In an upbeat piece in Zeit Online, Baumann says that the Master Plan is still possible. Switzerland should rely on its traditional strengths: creating stability. And according to Baumann, it should continue to clean up its act as regards banking secrecy!

Swiss Re Risk Talk has cap at hand

This evening's Risk Talk at the Swiss Re Center for Global Dialogue was, as usual, excellent and assembled a capacity crowd of local business people and researchers.

World Economic Forum's Sheana Tambourgi set the theme for the discussion by reviewing the results of the WEF's new Global Risks Perception Survey. According to Tambourgi the survey distilled details of the complex and apparently escalating 'global risks landscape' to reveal a core set of risk ingredients that includes collapsing asset prices, over-stretched fiscal pledges, the future of China (and India) and of course climate.

Seems that the Survey is the result of an extensive talk-fest sponsored by the WEF involving 120 experts based in New York, London, Zurich and also Kenya, Turkey, China and India. The results have been fed into a clustering algorithm that churns out what Tambourgi calls a Risks Interconnections Map.

Each of the risk ingredients mentioned above appear as tightly interconnected clusters on the map. The map consolidates economic data from 160 countries and expert opinions on 24 separate risk categories. According to Tambourgi, the map indicates how risks interact with one another and has the potential to anticipate the "propensity of a given risk to trigger other risks".

Interconnectedness is also the theme of Swiss Re's David Bresch research focusing on climate change. As head of Swiss Re's Atmospheric Perils Group, Bresch identifies CO2 as a common thread linking together the ever growing world economic losses due to climate change.

It was at this point that the audience witnessed the re-insurance angle. Bresch presented some neat results estimating the ratio of insured versus uninsured global economic value during the past 30 years. In the mid 1980's this ratio was sitting on its historical average of roughly 50:50.

But in the last two decades there has been a dramatic rise in the proportion of uninsured global capital such that a mere 20% of it is currently covered by insurers and re-insurers. Bresch calls for action to reduce the resulting hike in risk faced by the global economy. His preferred method to hand: the creation of a global carbon market using cap and trade.

Thomas Hess, chief economist at Swiss Re, presented some very elegant mathematical models of the global financial risk landscape. According to Hess' calculations, the impact of the ongoing financial crisis on the real economy "is just getting started". His analysis focuses on an historical analysis of the default rate observed in so-called speculative grade companies.

This key business risk index typically stands at around 5%. Hess' warning about the possibility of nastier things to come is based on the observation that the current value is barely above this historical level, yet his model predicts that it will peak at 21% during the course of the crisis.

To put that percentage in perspective, the peak speculative grade default rate during the deep global recession of the early 1990s was a mere 12%. The dramatic bursting of the dotcom bubble in 2002 yielded a value of just 10%.

The problem, Hess emphasized, is the potential for this kind of upheaval to destroy good companies as well as bad. And Hess didn't seem to have the same enthusiasm for market based solutions as Bresch had presented before him. Hess quipped "When will the current crisis end? When the next bubble starts."

So can cap and trade really provide an interconnected solution to the global economic and environmental calamity we seem to be facing? The most recent news from the EU's carbon trading scheme would suggest otherwise.

Alas, we are yet to see the dawn of a new bubble in the value of carbon credits.

A sobering thought on the civility that society holds so dear

Balancing loyalty and competition is important if a group of individuals are to achieve their best in a creative and productive collaboration. Oxford sociologist Jerome Ravetz reviews a new book about scientific societies during the Enlightenment in this week's edition of Nature and reveals the subtle challenges involved in getting this balance right.

Describing the delightful civility of the British Royal Society in the seventeenth century, the book's author Steven Shapin seems to have turned a blind eye on what Ravetz calls the dark side of this very fertile period of European research: Newton's dubious treatment of Gottfried Leibniz concerning Leibniz's contribution to the development of calculus.

Ravetz reflects on the dark secrets that seem to characterize so many periods of intense innovation by considering the genteel world of the Quants in our banking system. The quiet confidence of this group of talented souls is contrasted with the violent collapse of their elaborate financial constructs during the past 2 years.

I was reminded of a comment by another researcher of loyalty and competition, Ernst Fehr. Fehr (pictured, centre) has devoted the best part of a decade to demonstrating the importance of loyalty and other forms of what he calls 'other regarding preferences' for the successful functioning of modern society.

Fehr's research presentations are music to my commune-attuned ears and sensibilities, but I am glad to have also heard him present the dark side of his position on group loyalties. On one occasion he calmly commented that "of course, the mafia also display a well developed sense of loyalty and other regarding preferences,".

As Ravetz concludes in his reflection on the contribution of civil collegiality in the financial meltdown, "[it is] a sobering thought".

Self and other-regarding preferences throughout the life cycle

A new film, and a new paper in Nature this week pinpoint exactly when children develop a sense of consideration for others. The film, in addition, pinpoints the age, later in life, when this socially important behaviour appears to vanish entirely.

First to the paper in Nature by researchers Fehr (photo, middle), Bernhard & Rockenbach. It shows that children as young as 8 years old demonstrate a complex set of egalitarian tendencies. Egalitarianism involves the distribution of resources in an equitable fashion between self and other, even when this distribution involves a personal cost.

Many argue that this preference is the bedrock of human cooperation, so it is important to know when and how it evolves in us. We are not born with it. Three year olds have no discernible preference towards sharing and almost never share when sharing results in personal cost to themselves.

The celebrated part of this paper is the meticulous care with which conclusions can be drawn about the precise nature of other regarding preferences. Using methods tailored for children that have been adapted from highly sophisticated experiments used to study adult behaviour, Fehr can easily distinguish human altruism from a host of distracting facsimiles, such as the tendency to be merely helpful. Helpfulness is observed in many kinds of animals.

I wouldn't want to diminish this beautiful experimental work, but I happen to have just heard about a new Ben Kingsley film that seems to chart the age-related decline of other regarding behaviour with an equally impressive accuracy and precision.

Elegy, featuring Ben Kingsley and Penélope Cruz, is a film adaptation of a Philip Roth novella about a Columbia literature professor having an affair with a student. Nicely framing behaviour across the human life span, the film examines self versus other preferences in young women and men in their mid 60s.

The film looks terribly, terribly nauseating. But it seems to provide an elegant study of the disintegration of other regarding preferences during old age and the subsequent return of mental functioning that is characteristic of early childhood. And as a work of pure fiction, the storyline also portrays the generous other regarding tendencies of younger folks that choose to live with such men:

Cruz dialog: "I didn't ask you what I was gonna do. I asked you what you wanted to do with me".

Kingsley dialog: "I was in love with her, George. I have never felt like that ever in all my life."

Cruz dialog: "I am happy".

I'd seen enough by the end of the trailer, but I trawled around and found an illuminating Ben Kingsley Guardian interview by Brian Logan:

"Very soon preconceptions of me, if there are any left, will be meaningless, because I'll be moving too fast,". [Kingsley] makes a karate action with his arms, to indicate how confused we'll all be. The child in him will be pleased at that.

"Egalitarianism in young children" is published on page 1079 in the August 28th edition of Nature. Elegy is coming to a cinema near you.

Lights, Canberra, inaction

Earlier this month I read two very different policy announcements about innovation. The first came from the European Commission and declared hopes that 2009 would be the European Year of Innovation.

The image of the light bulb comes from the official EU press release. Both the image and the sentiment surrounding the announcement speaks volumes about the top down notions held by the Commission about how to realize economic gains from Europe's rich and diverse research base.

A prime example of this top down, and frankly wishful, thinking is the European Institute of Technology (EIT). Intended to rival the MIT as a centre for innovation and the commercialization of research, the EIT was officially launched on March 11th this year by the European Parliament.

If the Commission's hopes are realized and 2009 is declared the European Year of Innovation, the EIT will doubtlessly take centre stage at the celebrations. The only problem is that no one seems willing to come to the party.

The Commission expects universities and companies to fund a lion's share of the EIT's ambitious development costs. Yet the EIT concept has received what can only be described as scorn from academia, research policy groups such as the European Science Foundation and Industry.

Few predict that the initiative will result in any measurable degree of action.

Canberra
The second announcement on innovation came from what I would call a thinking person's academic policy think tank, the Group of Eight based in Canberra, Australia.

The announcement describes how Australian spending on basic research in 2005 has fallen to a third of the levels observed at the beginning of the 1990s.

As Go8 chairperson Alan Robson points out, changes in the way research is funded has created a situation in which "the winners are losers".

Government funding to the top performing research universities fails to cover the total costs of research, effectively forcing the most successful universities to cross subsidize their research from international student fees.

Robson also estimates that the funding shortfall has created a situation in which the top universities of Australia have deferred Aus$1.5 billion in university maintenance activities.

Urging policy makers to think beyond the orthodoxy of "turning ideas into money", Robson says that his priority is towards "building relationships and better communication between universities and the communities they serve".

The focus on innovation alone is failing to achieve this goal.

Banks as dangerous neighbourhoods

Tom Keene interviews Nassim Taleb about the deficiencies of Value at Risk models by explaining that empirical models cannot predict Jerome Kerviel's 5 Billion euro loss at SocGen on the basis of existing data, for example Nick Leeson's 860 Million loss at Barings.

The progression can only be explained by evoking nonlinear processes, says Taleb. Taleb suggests that the nonlinearity can be explained by the trend towards concentration in the banking industry (fewer banks, each larger in size) and by increased interdependencies between these banks (eg increased use of interbank loans).

The solution? Smaller banks; and more of them.

Pandemic preparedness in the 21st century

I'm back from another cerebral treat at the Swiss Re Centre for Global Dialog, Rueschlikon, Switzerland.



Andreas Reis, WHO Department of Ethics and Human Rights, reviewed the 50+ year history of pandemic preparedness. Back in 1952 the WHO created the Global Influenza Surveillance Network, now comprising 118 centres in 89 countries. Reis described how GISN has been tirelessly detecting and cataloging flu strains ever since.

The year 2000 saw the establishment of the Global Outbreak Alert Response Network (GOARN), which has already delivered vaccines and antivirals to more than 50 flu outbreaks in 40 countries.

GOARN has also advanced the thinking behind the institutional response to pandemics. Reis talked about the "Titanic" principle of vaccine allocation, in which women and children are privileged in the response to a pandemic.

He contrasted this with strategies in which health care professionals would instead get to jump to the front of the treatment queue. He emphasized that every strategy has its weakness.

Next came Basel county Chief Medical Officer Anne Witschi to describe the various phases of Switzerland's impressive outbreak response strategies. Witschi started with a description of Phase 3 of the response: the detection and isolation of a person infected with influenza A virus.

Contact tracing roots out those who have been exposed to the virus. Isolation of all traced contacts completes the picture for phase 4 of the response.

Phases 5 and 6 see mass vaccinations, - voluntary in Switzerland, and attempts to achieve social distancing. Social distancing refers to the prevention of any significant aggregation of people by shutting down schools, public transport and canceling all unnecessary workplace activity.

Remember that the Swiss government has stockpiled 8M doses of the antiviral Oseltamivir (Tamiflu) in anticipation of pandemic. Enough for every human in Switzerland.

Witschi described how Switzerland would manage the resulting traffic jams (no public transport) and boarder controls (people will make unpredictable moves to join family members and other loved ones). Much thought has gone into managing religious congregations.

Finally, medical insurance expert Peter Miller presented Swiss Re's models for predicting the death toll of a full blown pandemic. What was interesting for me was to learn that the mortality rate has never exceeded about 3% of those infected.

Miller was quick to point out how our preparedness has improved. A calamity of the scale of the 1918 Spanish Flu pandemic has, according to his models, been reduced to a 1 in 3000 year event.

One serious difference between the H5N1 flu virus and other threatening viral nasties is the time lag between when one can infect others and when symptoms start to show. Someone infected with SARS is symptomatic from the moment they can pass on the disease.

For H5N1, there is a 1 day time lag before the symptoms set in; a whole day when a victim can innocently infect others.

During question time marking the end of the meeting, the man sitting next to me raised his hand and asked Anne Witschi some probing questions about the Swiss stockpile of Tamiflu. "Is there really enough medical equipment to deliver treatment for everyone?", he asked.

"There's a full treatment course for every person in Switzerland," came the confident reply.

"And the syringes?" he probed. "Are there enough syringes stockpiled to keep treating people?".

Suddenly, just for a moment, the spell was broken. "There is still a small problem with the stock of syringes and needles," Witschi added sheepishly. The man ceased his questioning.

Afterwards, I asked the man whether he had already known the answer to his question. "I'm working in this area," he said. And then said no more.

Flu pandemics remain spooky, no matter how impressive 21st preparedness appears.

Links 2008.01.09: Hygiene, Social nets and EU-land media survey

Hygiene hypothesis links rising allergy rates with antiseptic modern life: new twist
Study by Bengt Björkstén explores human gut microbiome - sum total of microbes in the gut, for clues as to why rich microbiome correlates robustly with reduced allergy.

Social-networking biggest in Japan
Flattish growth in online membership around the 100M mark in the US is contrast with "rest of world" membership topping 400M and rising.

Citizens grumble about poor coverage of EU in media
Survey of all member states reveals that citizens feel EU news is insufficiently reported on TV (48% thought so), radio (46%) and print (36%), with generally positive attitudes about the quality of what media coverage there is.

There was little consensus regarding Internet media coverage. This surprises me. I'm always shocked that what little internet news covered European achievements covers is badly: Ever noticed that the media announces a 1 year delay for Boeing Dreamliner as 'confirming a plan' but announced the same news for Airbus A380 as 'troubled plane maker faces further delays'?

Falling investor confidence has and will cost us dear

This blog began 2007 with a comment on the fickle nature of investment in medical research.

Citing a recent Tufts University study on the pharmaceutical industry, I commented that rising development costs could not be the only cause for the high attrition rate in drug development. I wanted to turn the direction of causation around and suggest that pharma faces a problem with investor confidence.

After all, the increase in development cost is a long term trend in biomedicine, and the additional cost has been passed on to the consumer, i.e the sick. When an industry focuses so strongly on the risks of investment, is it not time to ask whether investment culture is itself in bad shape?

By July, that same investment culture made headline news when it collectively switched off interbank loans and other forms of short term commercial lending.
The results were immediate and visible across much of the globe; the 2007 liquidity crises was born.

The finger of blame pointed towards risky mortgages in the US. But problems in the mortgage sector cannot explain the ongoing calamity in the financial markets.
The numbers just don't support such a conclusion. So far, declared losses in the banking industry still fall short of the $300B mark that analysts estimate to be the losses for the sub prime mortgage sector.

When and if such losses are realized, $300B just happens to be the amount that banks made as profit in 2006. These kinds of losses shouldn't be a problem. Industries don't normally face mass annihilation when they wipe out the previous year's profit margin in losses.

To come full circle with my January blog, we can frame this situation as a problem in investor confidence and lending. Lenders are placing a high price on risk. Lending has dried up, and with that financial development comes the possibility of years of under-investment in all the industries upon which our prosperity depends.

If you are interested.... Nassim Taleb

Visit Tom Keen's Bloomberg November 16th podcast for a fast paced tour of 20th century banking and finance by Nassim Taleb. Author of Black Swan: The impact of the highly improbable, Taleb ruminates on why financial risk estimation remains such an imprecise science.

"Physicists do prediction very well," Taleb explains. "Let's say, to 10 decimal places. Whereas Economists? Well they can't predict better than cab drivers".

Why? Physics is empirical, or "bottom up". It pays, argues Taleb.

Risk methods give a false sense of security. In Taleb's words: "Instead of teaching people 'This is what we don't know'. They teach 'what we think we know'. The illusion of understanding uncertainty"...

The short story on Carbon Capture & Storage

Over the past two days, Swiss Re has gathered together a discordant group of experts on carbon capture and storage (CCS) at their spectacular Centre for Global Dialogue overlooking Lake Zurich.

After a tip off, I had the luck to walk into a panel discussion rounding off the event and heard the best of it, re-stated by the top speakers, in 1.5 hours.

You might have heard about this much toted miracle cure for global warming. Positioned as a solution good for the immediate term, current CCS technologies would greatly facilitate the elusive 80-90% reduction in CO2 emissions, - downing 7 gigatonnes of the stuff per year, required to shove the planet off its collision course with overheating.

I learned about BP's toy CO2 burying project in Algeria, In Salah, showcased by a slick Iain Wright. Equally slick Humphrey Institute of Public Affairs professor Elizabeth Wilson outlined the miracle possibilities of CCS and, with help from Swiss Re Risk Management VP Christina Ulardic, the associated risk of the gas leaking out again and possibly killing people.

But a deadpan delivery by Energy Research Centre Netherland's PhD student Heleen de Coninck more or less dispensed with the whole proposal. Coninck pointed out that pumping CO2 back underground was itself highly energy intensive (even with the existing well developed CCS technologies the so called energy penalty is 15-20%), and likewise highly unlikely given the disparity between the financial market value of carbon (very low, and falling) and the 25-40 euros per tonne needed to pay for CCS.

So there you go. I hope I have summarized the 90 minutes I enjoyed at Swiss Re in 3 minutes of reading.

Sorry you missed the excellent coffee, fruit juice and snacks.

Links: New science/culture organisation in Paris

Nature (October 18th) reviewed a new showcase for "art meets science" in Paris. Le Laboratoire opened on October 19th in 4, rue de Bouloi (75001 Paris) and has a gymnastic website to go with it. Visit www.lelaboratoirs.org and you'll see what I mean.

More alchemy from the political caste

Please forgive my fascination for the easy formulas offered by politicians as they promise to transform research into economic prosperity.

The European Commission is always the catalyst for this magic chemical reaction, and somewhere in the discussion the catalyst is named as none other than the European Institute of Technology (EIT).

Here's my latest alchemic discovery, published yesterday. Award winning MEP Dr. Chatzimarkakis asserts that "research is about turning money into knowledge and innovation is about turning knowledge into money".

This elegant statement of reversible chemistry reminds me of remarks made earlier by EIT champion Jerzy Buzek, MEP. Buzek believes that "it is impossible to finance innovation directly". Something is needed to fill the gap in between, he says.

Like Buzek, Chatzimarkakis calls for innovation to overcome the strong equilibrium constraints that make Europe's research treasures inaccessible to economic exploitation.

Using this logic, innovation becomes something money can't buy. Either you have it, or you don't. Or to follow these particular Parliamentarians to their logical conclusion, European researchers must innovate. On their own. Chop-chop!

Hope springs a leak

Few people knew about it, but until last month more than 1 trillion dollars in risky mortgages were ultimately being financed by loans that were being held for a matter of only days at a time. That might sound strange to the financially uninitiated. And now, even among financial types, the whole arrangement is suddenly on the decline.

Welcome to the current credit crunch in the world financial system.

Household banking names have had to turn out their pockets to finance the original mortgage obligations. Many of these mortgages were made to borrowers with slight chances of meeting their monthly payments.

By the beginning of September, several banks hit the panic button and said they couldn't afford to pay. Central banks around the world have had to step in to keep the loans afloat.

You might be asking how a bank could get caught out funding 30 year mortgages using loans that last only days?

The banks drove into this mess at high finance speed using what are called Structured Investment Vehicles, or SIVs. SIVs are offshore investments, virtually unregulated, for special purposes.

The banks earned good money from these racy little investment vehicles by selling the loans on to buyers in the so called commercial paper market. But commercial paper must be re-negotiated every few days, and that's where things went pear-shaped in August. No one wanted to finance the loans.

Is all this sounding far away form your everyday? Overly risky US mortgages. Offshore investment vehicles. And a rescue package from central banks. Maybe. But closer to home we have people camping out overnight to be first in line to withdraw their savings from UK building societies.

'More' should mean 'better' in research...

More news from the European Commission about how it plans to foster research in the European Research Area.

Science and Research Commissioner Janez Potocnik explained that 'Europe needs more research, but we will never have more research without more researchers'. Potocnik is taking advantage of the Summer Pause to promote the European Network of Mobility Centres (ERA-MORE), which aims to get researchers moving around Europe.

This is a great endorsement for increasing European research efforts but I miss, a little bit, a focus on quality.

It's heady stuff, but then that is never really in short supply in these kinds of announcements. Another memorable one was Potocnik's recent declaration that knowledge should be a "fifth freedom of movement" in the EU after the free movement of goods, services, capital and labour.

US joins the Basel II party

The Federal Reserve, Federal Deposit Insurance Corp. and other US financial institutions issued a joint statement on July 20th saying that they would join Basel II, a key global accord of financial regulatory bodies that has been hammered out in the Swiss city of Basel.

Various sticking points prevented the US from coming to the table, despite the fact that European and Asian economies had signed up more than a year ago.

At the core of Basel II is a promise from Banks to put aside capital reserves as protection from serious loses. The accord has been drawn up against a backdrop of financial deregulation over the past 15 years, and is seen by many as a critical guard against a global financial meltdown.

Basel II features a cocktail of complex methods for calculating the value of bank reserve assets, including novel methods to assess the riskiness of the reserve assets themselves. The complexity of these methods have created much hand-wringing debate. It was the techie, quantitative side of Basel II that drew my own interest.

Early on, the financial community feared that Basel II would bloat capital requirements and threaten bank competitiveness. Interestingly, one of the final sticking points for US participation was that the capital reserves would actually be lower under Basel II.

Thus, it was the Federal Deposit Insurance Corp. that threatened a veto, because Basel II would allow banks to hold lower reserve assets than those stipulated by existing US Bank lending rules.

The 12 large banking institutions in the US that will now comply with Basel II will also remain bound by the so called leverage ratio, a government imposed lower limit to the proportion of assets that banks are entitled to lend. With an agreement on this additional claus came the final settlement for US membership.

Earlier in the month, Middle East financial institutions made an announcement about their own progress with Basel II. A roundtable discussion involving financial representatives of the United Arab Emirates highlighted vulnerabilities in operational risk, i.e. risks associated with failures in systems, processes and people. A press release issued by the roundtable explained that regulators in emerging economies "lack credible, quality data" with which to evaluate their financial risk.

Basel II, the UAE roundtable argued, could be a source of competitive advantage for emerging economies by increasing banking efficiency and productivity. All of which is good news for those at the Bank of International Settlements in Basel, who can now count all major European economies, Japan and now the US at the Basel II table.