Risk Rap

Rapping About a World at Risk

Hedge Funds Navigating Industry Sea Change

This years Schulte Roth Zabel’s (SRZ) 19th Annual Private Investment Funds Seminar stuck a very different pose from last years event. One year on from the global meltdown of financial markets, languishing institutional certainty and the pervading crisis of industry confidence has been replaced with a cautious optimism. The bold swagger of the industry however is gone, in its place a more certain sense of direction and expectation is emerging. Though managers continue to labor under unachievable high water marks due to the 2008 market devastation, 2009 marked a year of exceptional performance. Investment portfolios rebounded in line with the upturn in the equity and bond markets. Liquidity improved and net inflows into the industry has turned positive during the last quarter as large institutional investors and sovereign wealth funds returned to the sector with generous allocations. These are taken as clear signs that the industry has stabilized and the path to recovery and the healing of economic and psychological wounds are underway. Yes the industry will survive and ultimately thrive again but it will do so under vastly different conditions. The new business landscape will require an industry with a guarded culture of opaqueness to provide much greater transparency while operating under a regimen of greater regulatory scrutiny.

The 1,900 registered attendees heard a message about an industry at a cross road still coming to terms with the market cataclysm brought on by unfettered, unregulated markets and excessive risk taking. SRZ offered an honest assessment in examining the industries role in the market turmoil. Speakers alerted attendees to an industry at a tipping point. To survive the industry must adapt to a converging world that believes that uniform market rules and regulations are the surest safeguards against catastrophic systemic risk events. A global political consensus is emerging that expresses support for industry regulation as an effective tool to mitigate the pervasiveness of fraud and market manipulation that undermines investor confidence and ultimately the functioning of a fair and efficient open free market.

Paul Roth, Founding Partner of SRZ, noted in the events opening remarks that the market is beginning to recover as evidenced by industry AUM once again exceeding the $2 trillion mark; but he warned that any exuberance needs to be tempered with the understanding that the new normal would not resemble the pre-crash world. The days of cowboy capitalism and radical laissez-faire investing are clearly over. Indeed Mr. Roth wryly observed “the industry must develop a maturity about the need for change. He concluded “that the industry must respond by playing a constructive role in forming that change.”

The conference subject matter, speakers and materials were all top shelf. Break out presentations on risk management, regulatory compliance, distressed debt deal structuring, tax strategies and compensation issues all reinforced the overriding theme of an industry in flux. The presenters passionately advocated the need to intentionally engage the issues to confront accelerated changes in market conditions. By doing so, fund complexes will be in a position to better manage the profound impact these changes will have on their business and operating culture. Subject issues like insider trading, tax efficient structuring, hedge fund registration, preparing for SEC examinations and the thrust of DOJ litigation initiatives and how to respond to subpoenas were some of the topics explored.

To highlight the emerging regulatory environment confronting the industry, a presenter pointed to the Southerization of the SEC. This is an allusion to the hiring of former criminal prosecutors from the Department of Justice, Southern District of New York to go after wayward fund managers. The SEC is ramping up its organizational capability to effectively prosecute any violations of the new regulatory codes. The growing specter of criminal prosecutions and the growing web of indictments concerning the high profile case of Mr. Raj Rajaratnam of the Galleon Group was presented as evidence of an emerging aggressive enforcement posture being pursued by regulators. Managers beware!

Presenters made some excellent points about how institutional investors are demanding greater levels of TLC from their hedge fund managers. This TLC stands for transparency, liquidity and control. Creating an operational infrastructure and business culture that can accommodate these demands by institutional investors will strengthen the fund complex and help it to attract capital during the difficult market cycle.

The evening concluded with an interesting and honest conversation between Paul Roth and Thomas Steyer, the Senior Managing Partner of Farallon Capital Management. The conversation included increased regulatory oversight, compensation issues, industry direction and matching investor liquidity with fund strategy, capacity, structure and scale. Mr. Steyer manages a multi-strategy fund complex with $20 billion AUM, his insights are borne from a rich industry experience. He made the startling admission that Farallon has been a registered hedge fund for many years and he believes that the regulatory oversight and preparation for examiners reviews helped his fund management company to develop operational discipline informed by sound practices.

Mr. Steyer also spoke about scale and that additional regulatory oversight will add expense to the cost of doing business. Mr. Steyer believes that it will become increasingly difficult for smaller hedge funds to operate and compete under these market conditions.

Another interesting topic Mr. Steyer addressed were issues surrounding investor redemption and fund liquidity. During last years SRZ conference investor liquidity was the hot topic. Fund preservation during a period of market illiquidity and a fair and orderly liquidation of an investment partnership were major themes that ran through last years presentations. Mr. Steyer struck a more conciliatory tone of investor accommodation. He confessed his dislike for the use of “gates” as a way to control the exit of capital from a fund. In its place he offered a new fund structure he referred to as a “strip” to allocate portfolio positions to redeeming partners in proportion to the overall funds liquid and illiquid positions. He stated he believed that strategy to be more investor friendly.

Schulte Roth & Zabel has once again demonstrated its market leadership and foresight to an industry clearly in flux, confronting multiple challenges. These challenges will force fund managers to transform their operating culture in response to the sweeping demands of global market pressures, political impetus for regulatory reform and the heightened expectations of increasingly sophisticated investors. The industry could not have a more capable hand at the helm to help it navigate through the jagged rocks and shifting shoals endemic to the alternative investment management marketplace.

You Tube Music Video: Beach Boys, Sail On Sailor

Risk: industry, market, regulatory, political

January 16, 2010 Posted by | commerce, compliance, corruption, hedge funds, investments, legal, off shore, private equity, regulatory, reputational risk, risk management, SEC, sovereign wealth funds | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

The Cost of Banking Goes Up

screamThe severity of the banking crisis is evident in the 95 banks the FDIC has closed during 2009. The inordinate amount of bank failures has placed a significant strain on the FDIC insurance fund. The FDIC insurance fund protects bank customers from losing their deposits when the FDIC closes an insolvent bank.

The depletion of the FDIC Insurance fund is accelerating at an alarming rate. At the close of the first quarter, the FDIC bank rescue fund had a balance of $13 billion. Since that time three major bank failures, BankUnited Financial Corp, Colonial BancGroup and Guaranty Financial Group depleted the fund by almost $11 billion. In addition to these three large failures over 50 banks have been closed during the past six months. Total assets in the fund are at its lowest level since the close of the S&L Crisis in 1992. Bank analysts research suggests that FDIC may require $100 billion from the insurance fund to cover the expense of an additional 150 to 200 bank failures they estimate will occur through 2013. This will require massive capital infusions into the FDIC insurance fund. The FDIC’s goal of maintaining confidence in functioning credit markets and a sound banking system may yet face its sternest test.

FDIC Chairwoman Sheila Bair is considering a number of options to recapitalize the fund. The US Treasury has a $100 billion line of credit available to the fund. Ms. Bair is also considering a special assessment on bank capital and may ask banks to prepay FDIC premiums through 2012. The prepay option would raise about $45 billion. The FDIC is also exploring capital infusions from foreign banking institutions, Sovereign Wealth Funds and traditional private equity channels.

Requiring banks to prepay its FDIC insurance premiums will drain economic capital from the industry. The removal of $45 billion dollars may not seem like a large amount but it is a considerable amount of capital that banks will need to withdraw from the credit markets with the prepay option. Think of the impact a targeted lending program of $45 billion to SME’s could achieve to incubate and restore economic growth. Sum2 advocates the establishment of an SME Development Bank to encourage capital formation for SMEs to achieve economic growth.

Adding stress to the industry, banks remain obligated to repay TARP funds they received when the program was enacted last year. To date only a fraction of TARP funds have been repaid. Banks also remain under enormous pressure to curtail overdraft, late payment fees and reduce usurious credit card interest rates. All these factors will place added pressures on banks financial performance. Though historic low interest rates and cost of capital will help to buttress bank profitability, high write offs for bad debt, lower fee income and decreased loan origination will test the patience of bank shareholders. Management will surely respond with a new pallet of transaction and penalty fees to maintain a positive P&L statement. Its like a double taxation for citizens. Consumers saddled with additional tax liabilities to maintain a solvent banking system will also face higher fees  charged y their banks so they can repay the loans extended by the US Treasury to assure a well functioning financial system for the benefit of the republic’s citizenry.

You Tube Music Video: The 5th Dimension, Up Up and Away

Risk: bank failures, regulatory, profitability, political, recession, economic recovery, SME

September 30, 2009 Posted by | banking, business, commerce, economics, government, Hamilton Plan, private equity, regulatory, SME, sovereign wealth funds, TARP, Treasury | , , , , , , , , , , , , , , , , , , , | 2 Comments

No Transparency from Corzine

Whats on Corzine’s Agenda?

Gov. Corzine is calling a meeting at NJIT of New Jersey’s best minds to deal with the economic crisis. The meeting will be closed to observers and to the public.

Corzine should open up a window of transparency. All these closed door meetings only serves to estrange the government from the public trust. Remember Cheney’s closed door meetings and the role it played in formulating the nations failed energy policy. All American’s paid dearly for that one.

The economic crisis will seriously effect state and local governmental institutions ability to fund and provide services. Its amazing the degree of involvement governmental agencies and officials are stepping in to manage the crisis. Mr. Cozine’s Goldman Sachs pedigree will serve him well. It seems the collegian club of GS alums are in control of everything.

Is Corzine meeting with friends to carve up state regulated banks and insurance companies that are on the brink of insolvency?

Is Corzine discussing the closure of the public school and transportation systems because the state has cash flow problems?

Is Corzine discussing the seizure of state pension fund assets to fund the current cash flow needs and further deplete the pensions assets?

Is Corzine finalizing a deal on the sale of the NJ Parkway, Turnpike, The Port Authority and the State College & University system to a syndicate of private equity funds lead by the Chinese Investment Corporation and other large Sovereign Wealth Funds?

We don’t actually know. Thats why Mr. Corzine needs to provide a little transparency and let the citizens of New Jersey know whats going on and how it affects them.

Risk: transparency, accountability, public trust,

Music: The Rays, Silhouette on the Shade

September 22, 2008 Posted by | China, credit crisis, government, pop, private equity, sovereign wealth funds, taxation | , , , , , , , , | Leave a comment

Another Monday Morning Fire Drill

The historic actions and non-actions by the Fed and Treasury Department continue the accelerating velocity of change in the global banking system.

The decision not to rescue Lehman Brothers was a sign of confidence in the capital markets. The acquisition of Merrill Lynch by Bank of America was a dramatic shattering of the last vestiges of Glass-Steagall Act prohibition of FDIC insured commercial banks owning investment banking institutions. This also represents a radical reconfiguration of the US and global capital markets industries.

Dow constituent AIG and its $1 T balance sheet has been a capital market problem child for the past few years. AIG has been mired in scandal for price fixing insurance premiums, accused of poor governance controls and the market has been critical of AIG for the unmanagability of its business units and the ballooning portfolio of its credit default swap and other risk transfer products correlated to the credit markets. It is seeking a $40 B bridge loan from the Fed to shore up capital while it seeks additional infusions from investors to avoid a credit downgrade by the major credit rating agencies.

The Fed also hinted about the creation of a special solvency fund of pooled assets from SWF, private equity providers, governments and other institutional investors. Perhaps this is the pool that AIG will dive into for its bridge loan?

These are incredible developments and our regulators, governmental institutions and industry executives are doing their best to manage this crisis. They are walking a fine line inching towards the precipice of where free markets and a managed economy intersect.

WOW. Is our hair on fire?

Music: Edward Grieg, In the Hall of the Mountain King

Risk: free markets, banking system, Glass-Steagall Act, Federal Reserve,

September 15, 2008 Posted by | banking, classical, credit crisis, regulatory, sovereign wealth funds | , , , , , , , , | Leave a comment

Let 100 Flowers Bloom

The FT reported that the China Investment Corp. (CIC) a Sovereign Wealth Fund with $200 billion in assets is looking to team up with the private equity firm JC Flowers to make acquisitions in the financial services industry. CIC has been somewhat active in acquiring financial services assets in the United States. CIC’s portfolio companies now include, Morgan Stanley, VISA and Blackstone Group.

After walking away from it’s commitment to buy Sallie Mae JC Flowers is loaded for bear and sees tremendous investment opportunities in the distressed asset valuation of financial services firms. It is a classic vulture fund mentality that sees great opportunity in the depressed equity valuations within a sector.

The US banking industry is ripe for rationalization. During the height of the credit marketing orgy, small banks were popping up like mushrooms after a soft summer rain. Cheap credit and funding sources flush with cash from the surging values in real estate and public equity markets put a banker on every street and an equity line of credit for every home. Risk aversion in the credit markets and dried up liquidity are changing the face of the sector and many of the publicly traded community banks need to attract equity capital to strengthen their balance sheets or merge with other banking institutions.

Vernon Hill, the former CEO of Commerce Bank, (recently acquired by TD Bank) has set-up a private equity fund to make acquisitions of small and mid-cap banks. The face and ownership of the banking sector is evolving. A drastic change in the systemic and regulatory structure of the banking industry is a welcomed inevitability. Global investors, regulators and industry executives will be hard pressed to balance the interests of bank stakeholders while serving the vital social function of facilitating commerce and finance for communities, corporations and consumers.

You Tube Video: Bird and Diz playing Hot House.

Risk; financial services, credit, regulatory, private equity, SWF, community banking

June 19, 2008 Posted by | banking, China, credit crisis, hedge funds, jazz, private equity, sovereign wealth funds | , , , , , , , , , , , , , | Leave a comment

Riding The Acela Express

I don’t really know what Acela means.

I imagined it to be a Greek or Latin word perhaps the name of a divine conveyance or swift footed messenger from Roman mythology. It’s probably nothing that deep. Most likely it is one of those made up words invented by a high powered marketing firm on Madison Avenue. Most know it as the rebranding of Amtrak. A kind of corporate rechristening available only to the well capitalized and those blessed with fat marketing budgets. They had to do it. After the supply-sider victory of the Reagan Revolution the legacy of losses and unending government subsidies to the failing railroad industries had to be purged from the new American political lexicon. It’s kind of like when Khrushchev was removed from power in the USSR. History books had to be rewritten to exclude the memory of Khruschev’s glorious contributions to building a workers’ paradise with Stalinist absolutism.

Riding the Acela Express from Newark New Jersey to our nation’s capitol in Washington DC provides a front seat view of a sad and sobering survey of our quickly evaporating manufacturing base and our country’s diminished industrial strength.

Riding the Acela Express down the spine of our county’s once formidable east coast industrial corridor presents a sad irony. The former Soviet Union unintentionally destroyed its economy due to its inefficient deployment and allocation of capital. While the United States, the USSR’s great historical antagonist and seeming victor of the cold war, destroyed it’s manufacturing base through the carefully considered rationalization of our industries by reallocating capital to foreign markets in search of superior returns.

In practice, this meant closing old inefficient factories and moving them overseas. From an economic standpoint it makes perfect sense. Capital seeks its best return. If that return can be found in an overseas market where labor costs are lower, tax rates are more favorable and regulatory oversight is non-existent the shareholders of the firm that closed the doors on US workers will realize a better return on their equity investment. That’s how capital markets work. Michael Milken and other predators would have a ball and build many fortunes instructing corporate America on the finer points of financial alchemy and demonstrate how easy it was to spin gold from the junk of old rust belt industries.

At first it kind of made sense. We didn’t want those kinds of jobs anyway. They were dirty and caused pollution in our communities. These types of businesses were highly unionized and susceptible to industrial disputes that only antagonized the uneasy relationship between labor and capital. Many of these industries were too capital intensive and the investment needed to maintain world class competitiveness was just too high to see any kind of acceptable return within the required time frames that benefited management and shareholders. The US was moving to a service oriented economy that obviated the need to manufacture anything. We would be an economy of designers, merchants, consultants, marketers and bankers. We did retain some clean, high tech, lite and lean factories that would rely on assembling machines from various components sourced just in time from overseas manufacturers. That was the industrial and economic vision of post cold war America.

But the vision outside my window on this Sunday morning Acela Express ride looks very different. They say that Georgian’s know their home when they see the red clay soil of their beloved state. As I pass through the metro areas of Trenton, Camden, Philadelphia, Wilmington and Baltimore I see miles and miles of half demolished factories whose crushed emulsified bricks have turned the earth of these abandoned industrial brownfield to blazing acres of red ochre.

The landscape offers a view of row after row of empty disassembled and decaying factories. They litter the landscape like forgotten industrial sarcophagi that was long ago broken into and pillaged, its contents whisked away by savvy tomb raiders.

The abandoned shipping docks whose bills of lading long since posted last orders that disembarked decades ago. Old forges, not fired since our Great War now stand as furtive tombstones to a productive past. These committed sentinels still stand post, watching over rusted rails that once creaked under the weight of bulging freight cars delivering goods to defend the arsenal of democracy. Now the rail yards serve no purpose other then rusted planter boxes for some invasive plant species. Closed beer gardens stand next to empty Union Halls whose cheap tin signage proclaims solidarity from a bygone day. You can still barely make out the union local number if you catch the right light from this mornings emerging sun. And the church steeples and factory smokestacks both covered in many layers of hard earned coats of gray soot stand in each others holy presence reminding us of the solemn Shaker proverb, “hands to work hearts to God.”

Last we witness the awful toll the dismantling of our industrial base has claimed on our urban communities. We pass archaic schools that rise like Gothic anachronisms, resembling prisons not Lyceums of learning. We see the tiny wooden row houses of Philadelphia and Baltimore and wonder how the inhabitants will sleep through a night where temperatures will remain uncomfortably hot. Nature and capital both abhor a vacuum. In the absence of legal industry and commerce such areas will become incubators for the growth of black-markets whose social cost and commercial thrust poses great risk to the heath and efficiency of free markets and the personal liberties of free people.

The USSR failed miserably in its attempt to build a workers state. Centralized bureaucratic planning, totalitarian political control, and the parasitic drain of capital by a class of ruthless self serving party elites strangled all entrepreneurial initiative and any hope for an efficient economic system. The possibility for workers to fully enjoy the fruits of their labors vanished as nothing more then an idealistic dream.

The current state of our manufactures and how we got there may turn out to be one of those funny ironies of history. What the Soviets did to their economy by accident and incompetence, we did to ourselves through intention. The industrial policies and practices we have pursued have strengthened the economies and industrial capacities of Russia and China. Both countries economies are experiencing robust growth. Russia due to its extensive oil and natural gas reserves is once again an emerging superpower that the United States must consider in its global political, economic and military strategies. China due to its rapid development of its manufacturing capacity now boasts tremendous balance of trade surpluses. China’s exports far more then it imports and it puts its surplus into its massive Sovereign Wealth Fund. This SWF is an investment vehicle that loans money to the large US banks to bolster their fragile balance sheets so we can get through this dangerous and debilitating credit crisis. The tables have dramatically turned.

The Acela Express. What a window it provides on the state of the American economy. After an exhaustive search I discovered a reference to Acela. In a far eastern language it refers to “a cloth less one.” Or in other words naked, as in the emperor has no cloths or perhaps we are vulnerable and exposed as a naked child in a blizzard without a strong industrial and manufacturing base? Or as in the “clothless one” hides nothing and always presents the naked truth. However you interpret Acela, let us hope that the Midnight Special continues to shine an ever loving light on you.

Music: Lonnie Donagen, Midnight Special

Risk: capital flight, manufacturing, labor unions, urban communities, political, global competitiveness, balance of trade, railroads,

June 14, 2008 Posted by | China, culture, folk, manufacturing, sovereign wealth funds, unions | , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

The Redistribution of Global Wealth

Singapore’s Fountain of Wealth

During 2007 the collective value of Sovereign Wealth Funds increased 24%. In aggregate the funds hold a total of $3.5 trillion and are growing fast.

The source of this wealth is massive surplus trade balances as in the case of China, the world’s largest SWF. This is followed by Russia and Kuwait whose source of wealth is oil and natural gas. The $3.5 trillion in assets are greater then the GDP’s of countries such as Great Britain, France or Germany.

Consider the banking crisis in the west. Goldman Sachs estimates that credit losses will approximate $1.2 trillion. These staggering amounts of wealth accumulation and wealth depletion is a startling indication of how the earths axis of geopolitical power is tilting away from the west.

Risk: credit, banking, geopolitical

April 30, 2008 Posted by | China, credit crisis, sovereign wealth funds | , , , , , , | Leave a comment

How Many Zeros Are In $53 Trillion?

Paul O’Neill just finished jabbering away on Bloomberg TV. Great stuff.

O’Neill declared the death of the private equity industry, opined on the evils of Sovereign Wealth Funds, stressed the need for banks to be better capitalized and raised a warning flag about the $53 trillion in unfunded liabilities lurking in the future federal government spending commitments.

I believe he also said “that government is broken.”

Was this guy actually the Treasury Secretary in W’s administration?

From his perspective it appears that Paulson is just rearranging the chairs on the deck of the Titanic.

Risk: Political, Banking, Deficit Spending

You Tube Video: Tennessee Earnie Ford, 16 Tonnes

April 16, 2008 Posted by | Bush, sovereign wealth funds, Treasury | , , , , | Leave a comment

Seven Lost Years

The World Bank ended its spring conference with a clarion call for world leaders to take urgent action to deal with the “Rice Crisis”; the dramatic rise in food prices and the political instability it is causing.

World Bank President, Robert B. Zoellick called for a “New Deal on Global Food Policy.” Zoellick is urging governments to provide $500 million in emergency funding to deal with the Rice Crisis. Failure to find a solution to the problem will result in “seven lost years” in our fight against world hunger. The prospect of New Dealers emerging from Bush’s inner circle is a bit ironic and may cause the Neo Cons to express dismay, but the urgent need to act is clear. The Rice Crisis is the greatest threat to global stability. Aligning and mustering the resources of the G7 Group, United Nations, IMF and World Bank to deal with the Rice Crisis is the best use of their institutional power.

Neo Cons can find some comfort in Zoellick’s proposition that funding to achieve forgotten Millennium Development Goals be provided by Sovereign Wealth Funds (SWF). Governments won’t have to add to the burden of future taxpayers by employing a Keynesian deficit spending strategy to fund their commitment to stabilizing the global production and distribution of food.

The mammoth SWFs are becoming the lender of last resort as they again are asked to ride to the rescue to salve the world’s economic wounds. It’s almost like a form of world communism has emerged to support the stability of state capitalism practiced by the developed world. A portion of the surplus value accumulated in the SWFs are now being returned to maintain fluid markets and political stability.

Risk: Political; Social; Economic; Inflation

You Tube Video: Hunger Awareness Video

April 16, 2008 Posted by | Millennium Development Goals, social unrest, sovereign wealth funds | , , , , , , | 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