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For no particular reason I could discern other than the book was lying around, I picked up Michael Crichton book Jurassic Park recently and re-read it for the second or third time.

I suppose I do this sort of thing to build up my meager knowledge of science since before Crichton got famous, most everything I knew about physics and the cosmos came from watching the original Star Trek series. In any case, Crichton talks a lot about Chaos Theory which, at least as it comes across in the Jurassic Park, can be boiled down to the idea it is a hubristic notion that humans can understand extraordinarily complex systems. Which isn't to say we will never get to the bottom of them, but rather that at the moment, we have about as much chance of doing this as cave men did of building a World Trade Center.

Meanwhile, our country's financial system seems to be, in the coded parlance of the upper crust leadership, under some stress. Or in the earthier words of our erstwhile national leader, who is a whiz at being simplistic,"that sucker is going down." Whether he meant Wall Street, his legacy, or both is unclear.

I gathered from the newspapers the core problem was that Wall Street rocket scientists had bundled up a lot of mortgages and other forms of paper and sold them off as "bonds" with the idea being that interest paid on the mortgages would serve as the interest on the bonds. Sadly, some of the mortgages were given to people who shouldn't have gotten them and they stopped paying. And we know more people will stop paying in the future. How many is the $700 billion question, so to speak. In any case, since there is now this element of the unknown in the equation, how valuable are the bonds? No one knows and so they get recorded on balance sheets with a zero. Banks and insurance companies that bought the bonds now have assets that are useless.

Now multiple the effect by a zillion because if bank A has these bonds, it has already lent money on them to bank B based on them while bank B has lent to C and so on.

Or at least that is how it struck me. The whole system was leveraged to the max which is how Bear Stearns could wind up with billions and billions in debts right before they imploded.

But this morning, James Richards,  the chief counsel to Long Term Capital Management, offered up a more nuanced explanation. He said the real problem was the Wall Street whiz kids were dabbling around with Chaos Theory in a bid to predict the behavior of an extremely complex system, this time the U.S. financial industry. They constructed huge computer programs that were designed to assign probabilities to various risk factors that could affect the value of the bonds they were peddling.

At least according to Richards, the whiz kids used a straight forward probability assumption which simply states that if you have flipped a coin fifty times in a row and it always come up heads, what's the probability it will come heads on the 51st throw? The answer is 50-50. If you want to get into wild probabilities, that would involve the question of what is the chances of throwing heads 51 times in a row on purpose.

So the computer programs were grinding away and they predicted the bonds would be safe 99% of the time.

The great failure of the whiz kids, at least according to Richards, is that they didn't take into account that one problem would lead to another in the financial sector. In other words, the system was all tightly linked and the real questions was what were the chances of throwing heads 51 times straight.. 

But everyone knows that trouble comes in threes. Hell, it's saying isn't it? And the explanation is straightforward. One problem can create another. Anyone who's raised kids knows this.  

I can't be sure Richards knows what he's talking about, but it seems highly plausible he does. After all, Long Term Capital Management was the poster child in the late 1990s for an irresponsibly led company that constructed a house cards out of billions of dollars and came to disaster.

In any case, it does seem clear that things are mess in the financial world. The fences in Jurassic Wall Street are down and the T-rex is out there roaming around eating people, roaring, and generally carrying on.

It would be kind of ironic if the whole thing was caused by a bunch of people who forgot what their grandmas used to tell them which is trouble comes in threes.