Risk Rap

Rapping About a World at Risk

The "R" Word and the Power of Semantics

Well he finally almost said it. Fed Head Bernanke hinted at the “R” word.

“Recession is possible” he said. “Our actions appear to have stabilized the situation in the markets somewhat, but markets remain under considerable stress.”

Now don’t you feel better? I do. But my level of warmth and fuzziness would be enhanced if his declarative statements on our current political economic condition weren’t clouded in such existential nuance.

Words like “possible”, “appear to”, “somewhat” gives me the feeling he’s hedging his words. Evidently he takes his role as the nation’s supreme fiduciary seriously. He will stop at nothing to protect Jim Cramer’s innocent day traders as they madly thumb the volume button on TV clickers while they eagerly finger the enter key on their E-Trade accounts.

You are allowed to say the “R” word Mr. Bernanke. Just because you say it, don’t make it so. You are a powerful man no doubt. You must adhere to restrictions as to what you say particularly during times of acute precariousness of the capital and credit markets. But great leaders take a stand. They articulate a vision and make known a course of action that your constituents (tax payers’ aka free citizens) can understand and believe so as they can prepare to take the action to protect themselves, their assets and liberties during times of great national duress.

Let me say that the “R” word is being spoken on Main Street. Particularly in neighborhoods surrounding Detroit where I understand the moral hazard casualty list is excessively high and continues to mount.

Say the “R” word Mr. Bernanke. It would be a refreshing departure from the “don’t ask, don’t tell”mantra that guides the American psyche deep into denial and an administration that is mired in a Pollyannaish view of its self created reality.

People do tend to blame the messenger. I guess it’s the association and connection with the awareness of a pending or present malady that requires considered action to mitigate. That’s not a bad thing. That is a good thing and is what effective risk managers do. They honestly assess risk factors and take earnest action to adapt to fluid situations. And by doing so, risk managers triumphantly overcome the pressing challenge by transforming it into an opportunity.

This is your opportunity Mr. Bernanke.

God speed on your endeavor.

Risk Rapper

April 4, 2008 Posted by | Bernanke, recession | Leave a comment

Risk Funding and the Beijing Boogie

Our heads continue to spin as events unfold in the global credit crisis. Investment and central bankers are doing a two step tango to temper reeling capital markets, restive politicians and the growing concern and confusion of citizens.

The corporate emissaries of Merrill Lynch, Morgan Stanley, UBS and Citibank goes hat in hand to the Sovereign Wealth Funds of Singapore, Abu Dhabi, Kuwait and The Peoples Republic of China. They dive head first into these giant liquidity pools to refresh their credit worthiness in the hope that by pouring many billions of dollars of equity capital into their porous balance sheets corporate solvency and national prosperity will be assured.

Remember how Lou Dobbs howled when the Emirates tried to buy the service contract for American shipping ports. I don’t believe I’ve heard a negative word from any of the isolationists about the same interests cornering the American banking market. I’m scratching my head.

The bluest of blue, blue chip private equity firm Carlyle gets a margin call from its broker while Fed Chairman Bernanke arranges a shotgun wedding between Bear Stearns and JP Morgan offering JP a sweet dowry of loan guarantees to take the plunge. I thought the world was ending.

By yesterday things were looking up a bit. Charlie Schumer gave Bernanke high marks for tempering his comments during his testimony to the Senate Banking Committee for his discretion on failing to betray confidences culled from secret discussions and brokered deals going on in the world’s central banks boardrooms. It was our Head of the Fed’s high point of the day and only chance to smile in an otherwise trying day as he squirmed a bit when asked about recession, moral hazards, sub prime mortgage bailouts and other central banking boog -a-lous.

I thought I even saw him shudder a few times as he considered his lonely position as the lender of last resort and grew a bit miffed as he pondered what an activist Fed entailed and how the US is slowly adopting the model of Chinese State Capitalism brought to our shores in the belly of a Trojan horse ordered by Walmart. Why its getting so crazy it almost fills you with nostalgia for the relative stability of the good old Long Term Capital Management days.

Ironically this is all transpiring while the major global banking institutions are preparing to implement the capital accords of the Basel II agreements prior to looming deadlines that never seem to arrive. Basel 2 has been in the works for the better part of this decade and if this current crisis can teach us anything it’s the need to take the funding of risk seriously.

Risk funding is an amorphous and complicated subject. It requires the honesty of objective assessment; unclouded by perceptions and methodologies that are prejudiced by pedestrian transactional, political and cultural interests.

The duality of risk- half opportunity half threat -always dances in a real time dialectic. It’s choreographed by algorithmic tempos noted in the scale of C++. It needn’t be so alien to our business practices nor anathema to unregulated egos of America’s uber free marketers who extol Milton Friedman during times of plenty but are the first ones at the federal trough when the markets are mean. Brother can you spare a dime to fund my misplaced risk, after all I’m too much of a fat cat to fail.

A great example of the failure to fund risk is The Peoples Republic of China. The PRC had a great opportunity to not repeat the historical mistakes the western capitalist economies made during their phase of rapid industrialization. But China seems to be following the same path as the west. They have not made an accurate accounting of the social and environment risks associated with its industrialization and the bill will soon arrive in the form of environmental remediation, health care for its citizen’s and dealing with political and social unrest.

I wonder if this was on Paulson’s Beijing agenda today. This along with scoring some great box seats for him and President Bush for this summers Olympic Games and secure a pledge to up their purchase of govies at the next US treasury auction.

Music: Yo Yo Ma “Brazilian Tango”

April 4, 2008 Posted by | China, hedge funds, Paulson, risk management, sovereign wealth funds | , , , , , , , , , , | Leave a comment