Raghu writes:
On 7/26/07, David B. Shemano <[EMAIL PROTECTED]> wrote:
What exactly is his insight? There is a great cost to taxpayers if the
industry is regulated but not if the industry is unregulated? There is
no one person to call? Diversification is good except when it is not?
His insight is that the regulators have lost control of the financial
system - and that system may be spiraling out of control.
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Which, of course, is what the bankers, investors, regulators and financial
press have nervously been saying for some time now, usually in the wake of a
hedge fund collapse like Amaranth or Bear Stearns. Like thrill film
audiences, they have been looking through their fingers in anticipation of
what is about to happen, and exhaling with relief when nothing really does -
still tense with excitement, though, about the "big test" yet to come.
Hilsenrath's piece captures the mood very well. Allayed by how hedge fund
failures have been contained to date, it tentatively hints at what is
probably the Wall Street consensus. Though risk is too dispersed to be
adequately regulated, "in many ways, this is the beauty of the system. Risky
investments are dispersed around the globe the way a sprinkle system
distributes droplets of water around a lawn. In theory, when trouble hits,
the risk is evenly divided and the overall financial system remains stable.
It seems to be playing out that way so far."
On the other hand, the one without the crossed fingers, "...there are
worrisome downsides to this financial architecture. The system hides risk
and concentrates it in hedge funds that regulators and other investors don't
understand. The hedge funds have access to huge amounts of debt, allowing
them to make big bets on investments that can go wrong very quickly...A
system designed to distribute risk also tends to breed it."
So no information here of the kind which hasn't been presented before or
which an investor could make money on, but for those of us who have a
political interest in these matters, these items do cumulatively provide an
essential window on the major concerns and debates of those who have power
and their own perception of how vulnerable the system is.
