Father of Financial Engineering Discusses Crisis

http://www.technologyreview.com/blog/post.aspx?bid=354&bpid=23367

Merton speaks!

"The central point of the first part of the talk -- the embedded put option in a plain vanilla loan, and associated nonlinearities -- is nice but I don't think it is as essential to the current crisis as he suggests. (It's obviously in his interests to downplay the complexity of new financial instruments relative to traditional ones. The difference, of course, is that we've had much more time to get used to the traditional ones and build the proper safeguards and regulatory systems.) Merton is refreshingly modest about his understanding of the complex causes of the crisis. At one point he notes that the post mortem investigation into the crisis is unlikely to produce a Feynman moment, in which someone holds up an O-ring that caused the disaster!"