Are big banks addicted to risk?


From the normally apolitical Oligopoly Watch.

The gambling, ahem, investment strategy took place in the totally unregulated over-the-counter future market, one almost totally immune from government regulation. At least the exchange future markets, where you can get clobbered as well, demands, as Roeder points out, “daily margin calls in the United States, so even the most obtuse investment bank quickly sees when it is a few million in arrears.” No such regulation exists at the OTC counter-and any attempt now will result in howls of “let the market decide.”

It’s hard to see this as an unfortunate case of aberrant behavior by a rogue trader. It is just a slight exaggeration of the top-down strategy of financial institutions.

If a financial institution thinks itself too big to fail because the government would do a bailout, then it has even less reason to mitigate risk. Such an arrangement also makes it quite unclear just who is governing who.

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