Comments on: A Few Notes From the Fordham Conference http://alephblog.com/2010/03/13/a-few-notes-from-the-fordham-conference/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 12 Feb 2012 22:02:53 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: dlrhttp://alephblog.com/2010/03/13/a-few-notes-from-the-fordham-conference/comment-page-1/#comment-24928 dlr Sat, 13 Mar 2010 21:13:16 +0000 http://alephblog.com/?p=2419#comment-24928 One thing I haven't heard discussed much but that seems to add lots of risk to the system is allowing regulated institutions to MAKE LOANS to hedge funds. I've heard some criticism of banks OWNING hedge funds, but nothing yet criticising the practice of LOANING THEM MONEY. And yet the risk associated with loans of this kind are systematically underestimated (on the way up), and of course, expose the banks just as directly to trading risk, as if the bank was trading directly on it's on account. And of course, making it easy for hedge funds, and similar has real systematic risks as well, spiking the bubble on the upside and crashing it harder on the way down. In fact, the same systemic problem exists for brokerage margin accounts. This is no legitimate benefit to society to letting people by securities on margin. It just results in a general increase in prices, and reduces the stability of the market. That being the case, banks with federally insured deposits, (etc, etc, etc), should not be allowed to lend to anyone for the purpose of buying securities. The only exception I can think of would be the case of a company that was buying derivatives to REDUCE RISK of some kind. Other than that, what are we doing subsidizing speculating? One thing I haven’t heard discussed much but that seems to add lots of risk to the system is allowing regulated institutions to MAKE LOANS to hedge funds. I’ve heard some criticism of banks OWNING hedge funds, but nothing yet criticising the practice of LOANING THEM MONEY.

And yet the risk associated with loans of this kind are systematically underestimated (on the way up), and of course, expose the banks just as directly to trading risk, as if the bank was trading directly on it’s on account.

And of course, making it easy for hedge funds, and similar has real systematic risks as well, spiking the bubble on the upside and crashing it harder on the way down.

In fact, the same systemic problem exists for brokerage margin accounts. This is no legitimate benefit to society to letting people by securities on margin. It just results in a general increase in prices, and reduces the stability of the market. That being the case, banks with federally insured deposits, (etc, etc, etc), should not be allowed to lend to anyone for the purpose of buying securities. The only exception I can think of would be the case of a company that was buying derivatives to REDUCE RISK of some kind. Other than that, what are we doing subsidizing speculating?

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