Risk Rap

Rapping About a World at Risk

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”

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April 4, 2008 - Posted by | China, hedge funds, Paulson, risk management, sovereign wealth funds | , , , , , , , , , ,

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