Wednesday, June 27, 2007

Update On Risk

From Bloomberg;

When asked on a conference call with analysts last week how a firm with a reputation for strict risk management could err in a market it dominates, Chief Financial Officer Samuel Molinaro said the asset-management arm is sealed off from the rest of Bear Stearns with a "Chinese wall."

"Clearly there are controls in place in the asset- management side too," Molinaro said on the call. "Obviously we didn't envision market dislocation of this degree."

I'm not sure I understand that statement. So, are you saying that you expected problems but you couldn't resist the opportunity to make money? Or, are you saying that you put up a wall so that any problems would be dealt with by a bailout from investors? (What is the loan Bear is giving the hedge fund anyway? A bailout from depositors or shareholders.) Or, are you saying that you put up a wall because you knew if things really got messy, the Federal Reserve and by implication the American people would bail out the mess while Bear kept the profits? I'm not really sure what the CFO is saying. If he reads this, maybe he could provide a less murky answer.

The trouble for the financial community hasn't even worked its way through the first inning. This is likely a precursor to significant upheaval. From a positive standpoint, that upheaval is necessary for the U.S. economy to get back on track as I've said before. From a negative standpoint, well, it's likely to get very ugly. This is one of many reasons I've written ad nauseum that the financial industry in the U.S. is peaking. First discussed here. Let's all hope Bear Stearns is successful in dealing with this mess. Not just for their sake but for everyone's sake. Of course, there is the economic theory that excesses should be left to fix themselves instead of being bailed out. Nice theory if jobs and people's savings weren't involved. That doesn't mean the markets won't make an example of the finance industry anyway. They will.

posted by TimingLogic at 12:16 PM

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