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Systemic risk: watch out it’s all around you

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Y'know there's been quite a lot of discussion about the systemic risks
in the market right now, particularly in light of the sub-prime
issues.  I've blogged about this a few times already, from hedge fund pressures through to algo technology explosions, but I purposely avoided too much discussion of the US sub-prime market as there's loads in the mainstream media.

However, there were a range of reports last week that started to show the domino effects on the markets from jeopardising Barclays Bank's bid for ABN AMRO to creating another Nick Leeson (or two or three) to undermining China's growth and expansion.

stories really raised my antennae, as they further added to the
richness of the dark clouds gathering over the world's investment

The first was the story that BSDs and MOTUs rule the world.

In everyday parlance, BSDs and MOTUs are Big Swinging Dicks and Master of the Universe.  These are the Liar's Poker
boys.  The high rollers.  The top traders.  They rule the world and
when you're on a roll, you're on a roll, and what a roll we've been on
... until this year's roll rolled off the rails.

Anyways, a survey came out last week from the US Institute for Policy Studies showing that the top US private-equity and hedge fund folks earn more in ten minutes than the average US worker makes in a year

figure was calculated using the latest numbers from the American
Department of Labour and Forbes magazine.  What they found was that the
average worker earned $29,544 per annum.  Meanwhile, the top 20 private
equity and hedge fund managers earned $35,100 every ten minutes, or
$657.5 million per annum or 22,255 times more than the average

Well done guys.  You rule the world.  BSDs and MOTUs all.

Then, the Daily Telegraph ran an insightful column over the weekend saying that  the bonus culture led banking astray.  Their point is that "the best and brightest in the City only have to make it through one cycle now to retire very comfortably"
so why worry about getting it wrong.  If you get it right once, you
can retire.  In other words, traders actually face little risk - only
the risk of keeping their jobs and if they keep their job for one year,
then they can afford to retire for life so there's no risk at all

What that really means is that in a world where a BSD
or MOTU can make 22,255 times more than the average human in a year ...
who cares if you screw up?  After all, I'm flying high.  I'm a roller.
I don't care. 

Or that's maybe what the Barclays Capital team believed until recently, when they had to spend $1.6 billion to prop up their structured investment vehicle, Cairn High Grade Capital Funding, which - alongside borrowing from the Bank of England and the resignation of a certain leading trader in the team, Mr. Cahill
- has led to Barclays share price tanking and serious questions as to
whether their equity-based buy-out of ABN AMRO can still go forth.

the MOTUs and BSDs are possibly susceptible to a soft under-belly but,
with 22,255 times earning per annum compared to mere mortals, who cares?

Well, the EU cares, and this was the third sub-prime story of the week.

The EU blames the German banks for importing US sub-prime issues into Europe's markets.  That's why MEPs and trade union leaders have told
European Central Bank President Jean-Claude Trichet that he has to sort
out any possible European issues in sub-prime by cutting interest
rates  and increasing regulation of financial markets at an EU level.

In other words, let's create a Euro-SEC ... something I discussed a year ago.

Y'know what though.

Give it a month or two and I'll bet all of this goes away. 

like the internet bubble burst in 2001, the housing bubble is bursting
for many in 2007 and the burst will leave pus all over the mortgage
markets.  For banks, this will create the view that this zit of a
market is darned ugly for a year or two.

So, for a year or two,
we'll all pile into convertible bonds or some other exotics ... then
MiFID and RegNMS will kick in and we'll forget all about the ugly
mortgage world of 2007 and it'll all go back to normal.

There you go dear, let's make it all better.

... meantime, it's a great excuse for Frankfurt to create a
stranglehold on European Regulation in line with, and with the support
of, MEPs who know no better.

Roll on November 1st so we can all
focus upon something meaningful like regulation rather than systemic
risk.  After all, the former is so much easier to deal with.


Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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