Wall Street & Technology: Blog: To Survive the Next Market Crisis, Be Like A Cockroach, Says Morgan Stanley Trader-Turned-Author

To Survive the Next Market Crisis, Be Like A Cockroach, Says Morgan Stanley Trader-Turned-Author

Richard Bookstaber, author of the book Demon of Our Own Design, offered some unique advice last night to financial firms that want to survive future crises (like the current CDO fiasco): Be more like cockroaches. Not in the sense of living in drainpipes and scurrying out at night to scare unsuspecting apartment and office-dwellers, as New York City cockroaches do, but in a survival-of-the-simplest ideal. While many "super designed" insects in certain jungles that developed specialized adaptions for only one type of flower or seed pod are now history, the homely cockroach lives on and on.

"The cockroach has survived over hundreds of millions of years and it can't even see, feel or hear," Bookstaber pointed out. "Its only survival skill is that when it feels the wind against its legs it runs in the opposite direction. In the financial markets we need to not super-design, but like the cockroach be less fine-tuned and more adaptable." Thus, he implied, firms would be better off dropping very complex, exotic derivatives and sticking to more simply structured investments.

The Wall Street executives in his audience (at the FasterStreet event organized by Intel) did not warmly embrace this idea. One buy-side executive countered that complexity isn't the same thing as instability. Bookstabber agreed, but said both are undesirable. Another audience member asked, "You're saying innovation is bad?" Bookstaber replied, "Some innovations in derivatives have come out that shouldn't be. If a product increases the probability of a crisis, it might not have enough economic value to be worth it. Simpler is better."

Posted by Penny Crosman at 09:46 AM

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