Comments on: Systemic Risk http://www.ritholtz.com/blog/2009/03/systemic-risk/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Sat, 21 Nov 2009 19:03:21 -0500 http://wordpress.org/?v=2.8.5 hourly 1 By: Kyle http://www.ritholtz.com/blog/2009/03/systemic-risk/comment-page-1/#comment-154130 Kyle Tue, 17 Mar 2009 07:48:36 +0000 http://www.ritholtz.com/blog/?p=21835#comment-154130 MG is right. The only reason systemic risks exist is because of insurance against defaults. It seems to me the way these CDSs were written and traded defies all logic and precedence. If a house is worth $500,000 no insurer will give you fire/flood insurance worth $10 million, otherwise everyone would find creative ways to burn their houses down. And no one knows who bet what and how much because it's all "confidential". MG is right. The only reason systemic risks exist is because of insurance against defaults. It seems to me the way these CDSs were written and traded defies all logic and precedence. If a house is worth $500,000 no insurer will give you fire/flood insurance worth $10 million, otherwise everyone would find creative ways to burn their houses down.

And no one knows who bet what and how much because it’s all “confidential”.

]]> By: sunny45 http://www.ritholtz.com/blog/2009/03/systemic-risk/comment-page-1/#comment-154092 sunny45 Tue, 17 Mar 2009 00:20:24 +0000 http://www.ritholtz.com/blog/?p=21835#comment-154092 Diversification in portfolio management supposed include UNCORRELATED assets so that systemic risk to over portfolio is significantly reduced. All the models talk about S&P (beta) as 1.0 to the spectrum of 0.1. My suggestion is why stop at 0.1 why not extend further (0.0 then -0.1) negative or 100% inverse correlation to -1.0! This definitely needs significant strategy allocation mix and change during neutral (side ways Mkt), secular Bull and secular Bear Mkt. Additional monitoring and tweakings needed ( Mkt neutral slight + or - bias) during over sold/bought rallies along the way. This means using PUTS, inverse ETFs and Beat Mfunds which are caste as volatile, dangerous and worse, inappropriate for an average investor (at least by Morning star!) This is how I constructed my portfolio and survived the on going secular Bear Mkt with bear minimum loss! Somehow this angle is very rarely raised or discussed! No wonder 99% of investors lost 50%+ in the last 18 months. For charging substantial fees ( a definite drag on performance), MFund managers and Money managers should have adopted, at least a variation of this approach in minimizing loss to client accounts. I am at a loss to understand their so called strategy or skill in managing risk? Did they assume business cycles, over evaluation and Bear markets are history? Diversification in portfolio management supposed include UNCORRELATED assets so that systemic risk to over portfolio is significantly reduced. All the models talk about S&P (beta) as 1.0 to the spectrum of 0.1.

My suggestion is why stop at 0.1 why not extend further (0.0 then -0.1) negative or 100% inverse correlation to -1.0! This definitely needs significant strategy allocation mix and change during neutral (side ways Mkt), secular Bull and secular Bear Mkt. Additional monitoring and tweakings needed ( Mkt neutral slight + or – bias) during over sold/bought rallies along the way. This means using PUTS, inverse ETFs and Beat Mfunds which are caste as volatile, dangerous and worse, inappropriate for an average investor (at least by Morning star!)

This is how I constructed my portfolio and survived the on going secular Bear Mkt with bear minimum loss! Somehow this angle is very rarely raised or discussed! No wonder 99% of investors lost 50%+ in the last 18 months.

For charging substantial fees ( a definite drag on performance), MFund managers and Money managers should have adopted, at least a variation of this approach in minimizing loss to client accounts. I am at a loss to understand their so called strategy or skill in managing risk? Did they assume business cycles, over evaluation and Bear markets are history?

]]> By: M.G. in Progress http://www.ritholtz.com/blog/2009/03/systemic-risk/comment-page-1/#comment-153998 M.G. in Progress Mon, 16 Mar 2009 20:08:49 +0000 http://www.ritholtz.com/blog/?p=21835#comment-153998 AIG recent disclosure of its list of counterparts should show that systemic risk is somehow a false problem. It's a matter to know in advance, not ex-post, who is at risk, how much money is to be paid and for what for each counterpart. Those positions could then be taken care of, sterilized or cleaned as appropriate. I do not see the need to maintaining the confidentiality of business transactions which are posing a risk for the system...And we still do not know what kind of transactions took place between AIG and major European banks and why, but everybody keep saying that there is a systemic risk...so that no bank or insurance company can fail. Confidentiality versus systemic risk? AIG recent disclosure of its list of counterparts should show that systemic risk is somehow a false problem. It’s a matter to know in advance, not ex-post, who is at risk, how much money is to be paid and for what for each counterpart. Those positions could then be taken care of, sterilized or cleaned as appropriate. I do not see the need to maintaining the confidentiality of business transactions which are posing a risk for the system…And we still do not know what kind of transactions took place between AIG and major European banks and why, but everybody keep saying that there is a systemic risk…so that no bank or insurance company can fail. Confidentiality versus systemic risk?

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