These could be the names for twin poster boys of this era of Wall Street expansion and collapse. Usury is that ancient sin of making money from money. Prohibited by religious mandates (and thus legal ones) in one form or another for millennia, receiving or paying interest on money is taken for granted in our modern economic system. But, one could argue that it reached the heights of insanity in the recent housing and derivatives-fueled credit bubble, creating its own ponzi structure.

As London Business School founder Charles Handy said recently in an interview on Kai Ryssdal's Marketplace radio show from American Public Media...

"And that's what the banks started doing. They forgot what their proper job was, in my view, which was to take money from some people who had some to spare and to pass it on to people who could use it usefully and profitably. And they started inventing nice little products that they came up with, which basically were a way of making money out of money."

That's a soft way of putting it. Appropriate, since Mr. Handy is a soft-spoken British gentleman. But he was just warming up, and it is likely his wisdom more than his kindness that commands the respect of business leaders and economists everywhere who seek his opinions and consultations on organizational behavior. He elaborated after Ryssdal asked for clarification about the purpose of lending and whether anyone would do it if they couldn't make money...

"That's right, but you must make sure that you don't exceed the money that you've been given by the people who are saving it. These people went wild, actually. They went way in excess of the ratios that normally were deemed respectable -- ratios of how much money they were giving out to the assets that they were looking after. They were very keen about selling things. They weren't too keen about managing the risk, because they thought that prices would forever go up. They got carried away. It's understandable. They were young, they were sitting in front of computers, they weren't out in the real world. They were selling, you know, interesting derivative products, which were ultimately based on house prices. But none of those people selling those things had ever visited the houses, which were the basis of their assets price, you know."

This is similar to what I've been saying for over a year ever since I read Nassim Nicholas Taleb's The Black Swan and learned about the severe limitations of risk models built on standard deviation. Those models, used by Wall Street quants (and those paid to believe them) to evaluate complex, long-term portfolios of bonds and asset-backed securities, have been fantastic fictions in many cases because they presumed two things: (1) to know the volatility of the given instruments, and (2)that the standard volatility curve was itself a reliable measure of the likelihood of a ten-plus deviation in financial markets. 

As Taleb taught us, standard deviation and the normal distribution of the bell curve were invented to measure the variance in the data of physical realms like human height and weight, and errors in astronomy.  The social universe, of which markets are a part, are a whole new ball game for such precise statistics.  Human behavior and it's extremes, along with human systems and their complexities, are far too "wild" to be measured by standard deviation and it's obsession with the mild, boring, and comforting "average."  Markets, indeed all social dynamics, are rarely mild, boring, or comforting. 

In Handy's interview from last week, which can be found on the Marketplace website here [1], he also predicts today's news...

"I think we'll see Citigroup (NYSE: C [2]) splitting itself up into much smaller kinds of entities."

Not a left-field, top-rope prediction, but I thought it worth mentioning since I am writing this today and Citigroup unloading SmithBarney to Morgan Stanley is the morning's top news. Check out the interview (available in print and audio) to also get his perspective on how investment and retail banking under the same umbrella "contaminate each other."

Not that my analysis is anywhere near the plane of Charles Handy, I offer a recent article of mine that touches on the topic of usury. In January's issue of SFO magazine, I wrote about "The Balancing Act of Put-Call Parity" and included some historical background about how the use of simple financial instruments to avoid the usury prohibition have existed for millennia -- sort of the story of put and call logic before Black-Scholes. Here's a link to the article:

The Balancing Act of Put-Call Parity [3]

Kevin Cook, ONN.tv [4]