One troubling aspect of the extreme risk-taking amongst bankers, traders, and other assorted wo/men of finance leading up to the crash was that everybody basically did what they should have done. I don’t mean that in the sense that it was responsible behavior – it was criminally irresponsible, and their actions preceding, during, and following the crash have been almost without exception despicable – but in the sense that there was nothing else for them to do. If they didn’t deal in derivatives and other risky products and generally throw economic caution to the wind, they wouldn’t have done well. They would have made less money than the competition, been seen by their investors as insufficiently profitable, and would have lost business. Risky business was the name of the game, and if you didn’t want to engage in it then you were better off in another industry.
Which makes the implications of the expected news that Goldman Sachs made a ton of money this quarter really, really unsettling. This, from an NYT story on the firm:
Richard Bookstaber, a former hedge fund executive and author of a “A Demon of Our Own Design,” wonders if Goldman’s resurgence will prompt other banks to push once again into riskier forms of trading, possibly at their peril.
“Someone takes risks and makes money — maybe they were smart, maybe they were lucky,” Mr. Bookstaber said. “But then everyone else feels like they need to take the same risks.”
While others are shying away from risks, Goldman is courting them. A common measure of risk-taking at Goldman and other banks is known as value at risk, which estimates how much money a firm might lose on a single day. At Goldman, that figure rose by more than 20 percent in the first quarter. Analysts predict Goldman’s V.A.R. ran high in the second quarter as well.
For Goldman, this risk-taking has apparently worked out well so far. Which is good, I guess, for them. But if and when other firms that have been avoiding such gambles – like Morgan Stanley, for example – start taking slack for posting losses and not reaping the huge sums that Goldman is, you could start seeing the type of risk cascades that can have pretty dire consequences for the economy as a whole.
In other economy-related news, Paul Krugman unsurprisingly had another good column today.
July 13, 2009 at 7:44 pm |
None of these bank CEO’s truly understood the level of risk involved in this bubble! All they saw were the immense amounts of profit exploding out of their investment banking divisions bundling this debt up for resale! NO laws were broken by them, this was all done within the structure of the regulations in place during the buildup of all this debt! “The World” was oblivious to the idea of too much supply of real estate, and was completely caught off guard when the puzzle was pieced together!
July 15, 2009 at 1:49 pm |
good to see you writing on here again