Risk Management – Page 3 – Abnormal Capitalist

Shadow Banking And The Global Financial Ecosystem

In either case, the fundamental problem we are dealing with is a financial ecosystem that has outgrown the safety net that was put around it many years ago. Today we have new types of savers (cash portfolio managers versus retail depositors), new types of borrowers (risk portfolio managers to fund pensions versus ultimate borrowers to finance investments and consumption) and new types of banks (dealer banks that do securities financing versus traditional banks that finance the real economy more directly via loans) to whom discount window access and deposit insurance do not apply.

These twin pillars of the official safety net were erected around traditional, deposit-funded banks to address retail runs. In contrast, the crisis of 2007–09 was a crisis of institutional runs where cash portfolio managers ran on dealers, and dealers ran on risk portfolio managers. But importantly – as the examples above demonstrate – beyond the institutional façade of the ecosystem it is ultimately real wealth and promises that are at stake.

→ VOXeu

Greed + Confirmation Bias = Disaster

It’s a natural human tendency to seek out conforming opinions – people who agree with us. It makes us feel “right” and good about our decisions. In the investing world, however, this is dangerous. When I form an investment thesis, I’m always trying to figure out why it’s WRONG, not why it’s RIGHT. I want to know the thesis of the guy on the other side of the trade as me – and then I can evaluate whose thesis is stronger.

→ Kid Dynamite’s World

The Messy (and Risky) Ways That Governments Try to Manage Risks

We are at serious risk because of the subjective nature of the way all these factors shape the risk management policy making we depend on to protect us. But in a democracy there is no way around this mess, because of the very subjective nature of ‘risk’ itself.

→ Scientific American

Three Things Investors Can Learn from Surfers

Ocean conditions can be calm one day only to be rough the next. This volatility is an important aspect of surfing because different ocean conditions call for different surfboards. Avid surfers know they are required to own a diverse collection of surfboards, allowing them to ride a variety of waves. From an investor’s perspective, market conditions are also constantly changing and, as in surfing, no single investment vehicle works well in every market condition. Thus, diversification is as imperative when investing as it is when surfing.

→ CFA Institute

The People Versus The Bankers

To understand why bankers love the status quo you have to understand how they pay themselves. Unlike most enterprises, labour actually has more power than capital at the big banks because debt plays such a huge role on bank balance sheets. To make shareholders feel better about this quasi-Marxist relationship, bankers use “return on equity” as a way to justify their compensation.

→ The Economist