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| Re: JP Morgan Chase Execs Vaporize $2B (941437) | |||
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Re: JP Morgan Chase Execs Vaporize $2B |
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Posted by Charles G on Mon May 14 17:24:39 2012, in response to Re: JP Morgan Chase Execs Vaporize $2B, posted by AlM on Mon May 14 16:45:49 2012. Nuclear bombs never develop if firms know there are no bailouts coming.In the case you describe, no other banks would allow themselves to have exposure to Citibank that could sink them. The mistake people make is that they think if AIG hadn't been bailed out that the world would have come to an end. In reality, AIG simply would have told their creditors "I don't have the money" when asked to post collateral. At that point the creditors would have taken 80, 50 or 20 cents on the dollar and moved on. Risk management isn't nearly as complicated as people make it out to be. When I buy protection for my portfolio, I look at how much exposure my firm already has to the firm I am buying from -- if it is beyond certain thresholds (based on the type of risk and protection being purchased), I have to buy from someone else -- even if that means paying a higher price. It bears repeating -- if people know and understand that there is no bailout coming, they will absolutely change their behavior. Counterparty risk is a bitch, and the banks have never taken it seriously. If you do take it seriously, it is relatively easy to manage. |
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