OWS gets support from odd quarters

The Occupy Wall Street protesters are getting support from some unexpected quarters, among them Mark Carney, head of the Bank of Canada. And he's not the only voice from the financial world suggesting we "listen up" to the calls for change.

Last Friday, Carney told CBC's Peter Mansbridge that the protests "highlight the need for policy makers to show they are serious about forcing change." He cited an increase in inequality that started with globalization and was made worse by the financial crisis. Carney is pushing for financial reforms that would make future crises less likely.

And as a former Goldman Sachs investment banker, there's a good chance he knows and understands the murky financial backwaters that spawned the 2008 crisis.

In 1998, Goldman Sachs helped bail out Long-Term Capital Management when the overly ambitious hedge fund executed a $4.6-billion pratfall that threatened to take financial markets down with it. It was a chilling precursor to the Lehman Bros. collapse in mid-2008, and could easily have led to the same dismal outcome.

LTCM had been established by a group of financial whiz kids partly to get out from under regulatory oversight and partly to play tiddly winks with U.S. tax laws. One of its founders was Myron Scholes, a former Timmins boy who grew up to win a Nobel prize in economics for co-developing the Black-Scholes formula, which provides a mathematical model for valuing and managing the risk of derivatives.

It's not a stretch to say hardly anyone understands the Black-Scholes formula. But almost anyone trained in Finance can plug in some numbers and spit out an answer. Apparently, the formula was much beloved by the high-flying Wall Street derivative traders in the lead-up to the 2008 financial collapse.

Here's the thing. Myron Scholes, for all his qualities, has been a spectacular financial flame-out since leaving academia for the world of hedge funds. In fact, he's a train wreck looking for a place to happen. He's a serial catastrophe generator, having engineered two less dramatic, but still gob-smacking, hedge fund crashes before joining the LTCM disaster.

Presumably, he was using his award-winning mathematical model to facilitate all that crashing and burning.

Which leads to three questions -- What is the fatal flaw in the Black-Scholes model, what role did it play in the problems we are facing today, and why are we letting these people go on and on with their catastrophic financial models?

Maybe Mark Carney knows. And maybe he can do something about it.

Let's not do this again in 2018.