Tuesday, November 13, 2007

Do financial risks add up to a constant number?

I am no physicist and one my main frustrations is how little I really get to understand of what the greatest thinker that has coincided with my life span, Albert Einstein, explains, and therefore I might be completely off the wall when I refer to having heard something like that the mass of the university, though it can take many shapes, is by the end of the day always a constant number.

Nonetheless these line of thoughts have lately crossed my more financially oriented mind when exposed to facts that seems to suggest that no matter what we do with the risks, no matter how we hedge them, no matter where we hide them, at the end of the day their amount could remain a constant.

If this proves correct then it must have great implications for how we design or perhaps even abandon our efforts to design our regulatory systems. At least it would not be so easy for our current bank regulators to go into their total immersion of risk adverseness, expecting to be applauded, if we knew that all they were doing was pushing the risks around.

Facts about our current financial turmoil

Fact 1a: Without the blessing of the credit rating agencies the lousily awarded mortgages to subprime lenders would never have been able to go global and turn into a tsunami.

Fact 1b: It was the short-sighted bank regulators who appointed the credit rating agencies as their imperial credit risks overseers even though they must have known this entailed severe systemic risk creation.

Fact 2a: If the banks have kept the mortgages on their books they would have been much more observant about what was going on and never ever would so many lousy mortgages to subprime lenders been awarded.

Fact 2b: It was the short-sighted bank regulators who through their minimum capital requirements and that were exclusively based on risk perceptions induced the banks to place their assets elsewhere.

Fact 3: As always small fish like mortgage brokers will carry the full blame while the real intellectual perpetuators will go free.