Category Archives: Risk and risk management

Too Big to Be Saved: Systemic Risk Alive and Well in Europe

With the recent Global Crisis, the interest in systemic risk and the interconnection between financial institutions has increased. This column investigates the case of European financial firms, where several factors can jeopardise a firm’s financial health. Using data since 2000 to evaluate the firms’ systemic risk, the authors find that for certain countries, the cost to rescue the riskiest domestic banks is too high. They might be considered too big to be saved.

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Who Wins in the Financial Casino?

I received a message last week from a savvy reader, a former McKinsey partner who has also done among other things significant pro-bono work with housing not-for-profits (as in he has more interest and experience in social justice issues than most people with his background). His query:

We both know that financialization has, among so many other things, turned large swaths of the capital markets into a casino

Here’s my thought/question: is there a house?

The common wisdom is that the ‘house wins’ in casinos.

So, who or what was really the ‘house’?

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Ilargi: Subprime is Back With a Vengeance

Yves here. While it remains an open question as to whether frenzied efforts to push investors even further out on the risk limb will come to fruition, the fact that so many measures are underway looks like an officially-endorsed rerun of early 2007. If the Fed indeed raises rates in the not-insanely-distant future, getting into subprime and other speculative credits is a quick path to losses. But even if the Fed and other central banks remain super-dovish, risky borrowers can and will go tits up independent of interest rates. Credit risk is not the same as interest rate risk, but the inability to get any return for the latter is producing an extreme underpricing of the former.

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US Corporate Executives to Workers: Drop Dead

The Washington Post has a story that blandly supports the continued strip mining of the American economy. Of course, in Versailles that the nation’s capitol has become, this lobbyist-and-big-ticket-political-donor supporting point of view no doubt seems entirely logical. The guts of the article: Three years ago, Harvard Business School asked thousands of its graduates, many […]

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Investment Bombshell: CalPERS Exiting Hedge Funds

CalPERS, the largest public pension fund in the US, is widely seen as an industry leader and its practices are emulated by other public pension funds. CalPERS has just announced that it is withdrawing from hedge fund investing entirely.

Ironically, the very first post on this website, on December 19, 2006, Fools and Their Money (Hedge Fund Edition), chided CalPERS for its continued loyalty to hedge funds.

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Philip Pilkington: The Efficient Markets Hypothesis Has Been Proved Wrong But Economists Do Not Want to Listen

Yves here. The Efficient Markets Hypothesis, along with the Capital Assets Pricing Model, is one of the cornerstones of financial economics. Pity both are wrong.

Actually, it’s worse than a pity, since financial economics informs not only how professional investors construct their investment portfolios, but similarly is the foundation for orthodox thinking among retail investors. And the Efficient Markets Hypothesis and the Capital Assets Pricing Model both understate market risk, so following their dictates leads investors to take on more risk than they intended to.

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Huarong’s Shadow Bank Bailout: This Changes Everything

Two days ago, we learned that the Chinese government was behind the bailout earlier this year of a trust product—a type of financial product that the central government has heretofore emphatically distanced itself from. Huarong Asset Management, using a 3 billion RMB loan from the Industrial and Commercial Bank of China (ICBC), the trust product seller, was the mystery lender behind the January bailout of the Credit Equals Gold trust product, the Financial Times reported on August 31. ICBC and Huarong Asset Management are both state-owned entities.

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New Zealand Companies Office’s $612Mn Money-Laundering Snooze

The Organised Crime and Corruption Reporting Project recently (21st August) published one of their periodic investigations, concerning a rather large moneylaundering scheme: Call it the Laundromat. It’s a complex system for laundering more than $20 billion in Russian money stolen from the government by corrupt politicians or earned through organized crime activity. It was designed to not only […]

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Ballooning Finance: How Financial Innovation Produces Overgrowth and Busts

Yves here. It’s a welcome surprise to see economists devise a model that delivers generally sensible results. Here, three economists looked at how financial innovation leads to an bloated financial sector as well as greatly increasing the risk of meltdown.

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Summer 2007 Deja Vu: Banks and Short Sellers Dump Risk on Chumps Via Complex Products

NC contributor Michael Crimmins flagged a Bloomberg article yesterday that described the proliferation of complex synthetic structures, depicting it as return to some of the bad risk-shifting of the blowout phase of the last credit bubble.

The amusing bit is the headline was toned down after the post was launched (you can tell by looking at the URL, which almost certainly tracks the original). The current version is the anodyne “JPMorgan Joins Goldman in Designing Derivatives for a New Generation.” But the very first paragraph flags the troubling resemblance to the last hurrah of the pre-crisis credit mania:

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“A Financial Casino Would Be a Step Up From What We Have”

This is a terrific and very accessible interview with Boston College professor Ed Kane, who is a long-standing critic of the failure to rein in financial firms that feed at the taxpayer trough. At one point in the talk, Kane and his interviewer Marshall Auerback discuss how casinos are well aware of the fact that the house can lose and they monitor gamblers intensively to make sure that no one is engaging is sleight of hand. Thus if we treated our banking system like the financial casino that it has become, we’d be much better off than we are now.

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Only Now Does Influential Bank Group Complain That Low Volatility is Producing Too Much Risk-Taking

The spectacle of banks wring their hands about how low volatility is leading them as well as investors to take on too much risk bears an awfully strong resemblance to a child who has killed his parents asking for sympathy for being an orphan.

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