Saturday, February 02, 2008

Are big banks addicted to risk? That rhetorical question the title of a recent Chicago Sun-Times article (1/27/08) by business writer David Roeder-the answer is "yes". The big talking point, of course, is the losing $7 billion gamble by trader Jerome Kerviel at France's #2 bank, Société Générale. Worse yet, Kerviel's wagers exposed the bank (and the world economy) to far more disastrous losses. But in the light of the subprime debacle, the incident is even more troubling. The gambling—ahem, investment strategy—took place in the totally unregulated over-the-counter future market, one almost totally immune from government regulation. At least the exchange future markets, where you can get clobbered as well, demands, as Roeder points out, "daily margin calls in the United States, so even the most obtuse investment bank quickly sees when it is a few million in arrears." No such regulation exists at the OTC counter-and any attempt now will result in howls of "let the market decide." It's hard to see this as an unfortunate case of aberrant behavior by a rogue trader. It is just a slight exaggeration of the top-down strategy of financial institutions. The whole matter is just another indication of how banks and other large financial institutions, under pressure to bring in ever bigger returns, can act like a Dostoevsky character at a roulette table. That, after all lost, is behind the whole subprime investment mess, which is still in danger of bringing down the whole financial world like a house of cards. As the article notes, Old notions that they can regulate themselves because their own money is at stake don't apply anymore. These are the same outfits writing off billions in bad mortgages. They are addicted to risk; if Kerviel's trading paid off, he'd still have a job, and his supervisors would be tallying their next bonuses. And, up to now, the Fed and the EC have moved heaven and earth to keep the situation form collapsing. That means a bailout from taxpayers, while the guilty CEO and their lieutenants at worst lose a bit of their bonuses) and, in most cases, walk away with a golden handshake and even get a job somewhere else. It is notable that, as I write, neither Kerviel or his Société Générale bosses have lost a single paycheck- they still have their jobs. The article puts it well: "Some traders say the big banks are 'too big to fail,' that they would receive a government bailout if they were in serious danger. Revise that rule. Treat them as 'too big to foul up.'" 9:45:37 PM

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