Who is Responsible for Global Financial Failure?

This is an incredibly open-ended question. There is not one person who is completely responsible for the troubles faced by the financial system, but there is a particular type of person who is.

The kind of person who is overconfident to the point where checking work meticulously to ensure its accuracy is going to be the guy who screws up calculations. Ultimately, the name of the game is risk management. It is important to have an open mind and figure out how to react to unique developments

The most recent development in human error occurred over Halloween weekend. The German government discovered an accounting error to the tune of $78 billion. The error, discovered on Hypo Real Estate's books, actually improves the financial situation in Germany. The blunder actually uncovered that Germany's debt is lower by 2.6 percentage points than expected.

In 2010, Germany's debt load dropped from 84.2% of GDP to 83.2%. It is currently at 81.1% of GDP, which is clearly a good thing. Regardless of the fact that the mistake improves the German economic situation, these types of mistakes are not acceptable - especially in a time when the global economy is fragile. The numbers have to be exact.

The fiasco at Hypo Real Estate outlines the type of attitude that is detrimental to the homeostasis necessary to preserve our financial system. It represents more than just a numbers error. It represents the people who overlooked certain qualitative factors in the US mortgage crisis. Many financial analysts and traders believed that diversifying geographical risk for mortgages would protect mortgage backed securities. For example, if a structured security contained mortgages from 20 different states, many people believed that the likelihood of multiple states failing at the same time was low. As we all found out, the underlying economic principles prevailed and the mortgages systemically failed.

People need to take everything with a grain of salt. Analysts need to question everything, especially in today's markets. If there are multiple people who believe a particular trend will always continue, it would be financially prudent to understand why that claim may or may not have merit. Double checking what you believe to be a fact may very well save yourself, your company, and your peers.

Another story of failed risk management includes MF Global MF. MF Global is a derivates broker-dealer that has recently filed for bankruptcy after making one too many risky proprietary bets. The company, under the direction of former Goldman Sachs GS CEO Jon Corzine, improperly managed its risk and failed to consider all possibilities while taking positions. Ultimately, MF Global got to the point where it was actively seeking a buyer, a common tactic when a company is rapidly becoming distressed and is losing cash flow quickly.

Apparently, MF Global also hired investment banks to discuss financial restructuring strategies. The securities firm will have a long time in court, as Chapter 11 bankruptcy requires intense negotiations. MF Global stated that its books contain up to $50 million in debt to creditors including JP Morgan JPM and Deutsche Bank DB. Had the company analyzed interest rates and global dynamics as a result of distressed sovereign debt talks, which started as early as April 2011, it may have been able to unwind crucial positions or at least hedge itself. It appears that MF Global had some employees that failed to consider all scenarios and determine the risks and possibilities associated with each possible outcome.

Especially given the high amount of volatility, individual companies as well as entire countries have been making the wrong calls because they let their overconfidence get the best of them. Sometimes, entire factions or entire entities fail. As individual investors, you can learn from the mistakes that professionals make. It always helps to be open-minded about investments and to understand why one investor may be long a security while another may be short. Calculating risk and sizing up investments accordingly will definitely minimize losses, as well as headaches. Always know the latest news, and always know what the smart money is thinking. Good luck, traders.