Risk Management: Bankers get rich. How about you? Part 2
So here's the deal with risk management - Wall Street style. I started talking about this in the last post. It goes like this.
You take risk, but it's not really risk. If you screw up, you get bailed out.
Now some of you aren't surprised. You may have seen it coming. If not, you should have. When you hear the phrase "too big to fail," that's what it means. It means an institution's going to screw up and get saved anyway. The excuse: if they fail, the world comes to an end.
I know, I'm being simplistic. I'm just not smart enough or sophisticated enough to understand. In fact, I used to think that myself. Now I'm not so sure. Now I'm thinking the "fix" is in. It's a real sweetheart deal. How do I know? Let's look at what happened since the bailouts.
Did banks lend that money the Fed and the government gave them. That's what they were supposed to do - lend money to get the economy back on track again. But no, they're not lending money.
Why bother. The real money's in risky trading. And guess what, the banks' trading business did real well. They made lots of money on trading - riskier and riskier trading.
And when the government started talking about more regulation - specifically regulating risky trading activities - the banks pushed back. No need. It crimps the free markets. It's not good for - us! Really, they're saying it's not good for us little folk out there.
Want to see the result of some of that risky trading? Try the hot stock market. It's shot up big time. And most of us little people aren't the ones pushing up those hot stock prices. In fact, most of the little people (the retail investors) have been buying bond funds, not stock funds.
So if we're not pushing up stock prices, then who's doing it? Guess. Right. All the buying, all the trading that's driving up stock prices comes from these big bad bankers. What else explains it?
But what the heck. They're just taking advantage of the risk/reward ratio. You know, you take more risk, you get more reward. Except for them, there's no risk! If they screw up, they'll get bailed out. If they succeed, they get to keep the profits.
Whew! I'm getting worked up here. But can you blame me? So let's go with the flow here.
Wouldn't you like a deal like that?
See, while we plug away, they slug away. We look for the right pitch to hit. They swing at everything. We try to avoid the big loss, keep our positions sized just right, doing all the things good, prudent risk management calls for. They throw their money down and double up.
I want that deal. I want to feel free to throw my money on the table and double up when things go wrong. And when I lose money for my clients, I want some bailout money to back me up.
Oh, and then I want to make a bloody fortune for my efforts.
The only problem is, I'm in the wrong profession. I'm not a big bad banker. I don't get that deal. And neither do you. Sorry.
Now, back to work.
You take risk, but it's not really risk. If you screw up, you get bailed out.
Now some of you aren't surprised. You may have seen it coming. If not, you should have. When you hear the phrase "too big to fail," that's what it means. It means an institution's going to screw up and get saved anyway. The excuse: if they fail, the world comes to an end.
I know, I'm being simplistic. I'm just not smart enough or sophisticated enough to understand. In fact, I used to think that myself. Now I'm not so sure. Now I'm thinking the "fix" is in. It's a real sweetheart deal. How do I know? Let's look at what happened since the bailouts.
Did banks lend that money the Fed and the government gave them. That's what they were supposed to do - lend money to get the economy back on track again. But no, they're not lending money.
Why bother. The real money's in risky trading. And guess what, the banks' trading business did real well. They made lots of money on trading - riskier and riskier trading.
And when the government started talking about more regulation - specifically regulating risky trading activities - the banks pushed back. No need. It crimps the free markets. It's not good for - us! Really, they're saying it's not good for us little folk out there.
Want to see the result of some of that risky trading? Try the hot stock market. It's shot up big time. And most of us little people aren't the ones pushing up those hot stock prices. In fact, most of the little people (the retail investors) have been buying bond funds, not stock funds.
So if we're not pushing up stock prices, then who's doing it? Guess. Right. All the buying, all the trading that's driving up stock prices comes from these big bad bankers. What else explains it?
But what the heck. They're just taking advantage of the risk/reward ratio. You know, you take more risk, you get more reward. Except for them, there's no risk! If they screw up, they'll get bailed out. If they succeed, they get to keep the profits.
Whew! I'm getting worked up here. But can you blame me? So let's go with the flow here.
Wouldn't you like a deal like that?
See, while we plug away, they slug away. We look for the right pitch to hit. They swing at everything. We try to avoid the big loss, keep our positions sized just right, doing all the things good, prudent risk management calls for. They throw their money down and double up.
I want that deal. I want to feel free to throw my money on the table and double up when things go wrong. And when I lose money for my clients, I want some bailout money to back me up.
Oh, and then I want to make a bloody fortune for my efforts.
The only problem is, I'm in the wrong profession. I'm not a big bad banker. I don't get that deal. And neither do you. Sorry.
Now, back to work.
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