Wheel of Fortune? Not Your Family Board Game

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2 Responses

  1. Joe says:

    Well, doesn’t the board pay people to do all that work for them and keep making them money?

  2. Ken says:

    One of the [many] failures in the financial marketplace has been the systematic overrating of credit-worthiness by the ratings agencies. Risk managers at banks rely on the giant credit ratings companies to provide an assessment of credit-worthiness, which then relates to the cost of their borrowing. Riskier borrowers pay more interest, and lenders pay more for the credit insurance that covers their risk.

    In the main, the lending arms of the big banks did pretty much what we should have expected in the way of risk management. The credit ratings companies (Moody’s, Standard and Poor, etc.) did a piss-poor job.

    And then there was that other part of the marketplace–the insurers. They were the cowboys, for sure. Making a market in credit default swaps is little more than what the bookies do at Ladbrokes. A pretty important difference is that bookies adjust the odds so they take in approximately equal amounts on both sides, so they can’t lose. AIG, on the other hand, bet hundreds of billions on one side, relying on the odds to be so much in their favor that they were rolling in money for a while. Oops … when the underdog wins, the payoff is painful.

    Just yesterday I red in the NY Times that there is a small London company named The Markit Group that has created indexes for CDS in national bonds. Some folks are now blaming The Markit Group for “the Greek problem.” The idea is that by having an index for the CDS, speculators are enabled to trade, including short selling, the index, which makes it harder for Greece to refinance its bonds, which may lead to collapse of the entire house of cards.

    I understand the banks, and their perceived need for insurance. They are giant banks who lent money to a large, developed, country, not some third-world hole in the map. Now they are worried that the Greek bonds may default. A valid worry, and I can’t fault them for getting into the pickle they find themselves in. After all, Greece has been around quite a while.

    So my question is this: Who the heck is issuing insurance on $85 billion of Greek paper? What’s their credibility to be able to cover their obligations if/when the Greek bonds default? Is it our old friends at AIG, at it again, or is it the next “too big to fail” high flier, issuing “insurance policies” that are nothing more than bookies betting on the point spread?

    And somebody wants to blame the folks who publish the index? Wouldn’t that be like blaming sports betting on the AP because they report the scores of the games?

    But returning to the original question — I think the Boards of banks have pretty much done what they can in re risk management, requiring that their banks implement risk management policies and procedures, and monitoring to make sure that the policies and procedures are followed. OTOH, I think the Boards of the insurers like AIG ought to be taken out behind the barn and whipped.