NEW DEVICE TO SPUR NEW WAVE OF FINANCIAL INNOVATION

BANZAI7 NEWS-- According to The New Scientist, AN ILLUSION device that makes one object look like another could one day be used to camouflage military planes, create "holes" in solid walls or spur a new wave of financial innovation.

The idea builds on the properties of a so-called meta-derivative-formula, which can bend reality in almost any direction. In 2006, researchers used this idea to create an "invisibility cloak" that bent microwaves around a central cavity, like water flowing around a stone. Any object in this cavity is effectively invisible.

Now a group of Wall Street backed quantitative engineers has gone a step further. "Asset appreciation is just an illusion of financial space, of hot air," says Mi Luck Yi, a "quant" and a co-author of the study. "We are extending that concept. We can make securitized toxic assets look like anything we want."

Instead of bending toxic financial waste around a central cavity like AIG, the team has worked out the mathematical rules for fencing dodgy assets in other ways. For example, a dodgy asset class could be designed to suspend losses in the same way as a gold bar would. So the light hitting the material would be distorted to make it look as if it were rated Aaa.

It is also possible to design a complementary security that has the opposite effect - to exactly cancel out the effect that all manner of financial crap has on a P&L. So a P&L distorted by a crap portfolio could be passed through a complementary material to eliminate unpleasant financial distortions.

The new illusion device uses these two ideas together. To make a bucket of crappy loans look like T Bills, for example, light first strikes the bucket of crap and is distorted. It then passes through a complementary metaderivativeformula which cancels out the distortions to make risk seem invisible. The light then moves into a region of the metaderivativeformula that creates a distortion as if a risk free asset were present. The result is that an observer looking at the bucket through the metamaterial would see a positive return.

The idea has some surprising applications. Luck Yi says the technique could be used to change the risk properties of an opaque systemic pig like AIG, allowing light to tunnel from one side to the other. That could lead to a device that when attached to an annual report, creates a "hole" through which viewers could see the other side.