Corporate Credit And Risk Management

842 Words4 Pages
On the other hand, Lloyd Blankfein, the CEO of Goldman Sachs, prefers to describe credit default swaps in terms of “risk management.” He says, “Because we had this risk, because we were accumulating positions…we have to go out ourselves and provide and source the other side of the transactions, so that we can manage our risk.” Although, that is simply a technical way of stating that they need to get even action on both sides of the bet, just like a bookmaker; but, on Wall Street they are known as “market makers.” Luckily, there are some on Capitol Hill who are willing to address these similarities. “You all are the house, you’re the bookie. (Your clients) are booking their bets with you. I don’t know why we need to dress it up. It’s a…show more content…
If he can’t do it, how does any investor reasonably think they can do otherwise? With all that said, derivatives are not inherently dangerous with the proper conditions in place as many non-financial companies buy derivatives in a responsible manner as a hedge for their business expenses. For example, an airline can hedge against rising oil prices or a multinational manufacturing corporation might hedge against a currency change with derivatives. In these instances, derivatives actually reduce systemic risk. In fact, even Warren Buffett uses them to some degree. However, it’s a potentially disastrous situation when Wall Street goes far beyond simply hedging risk and that is exactly what has happened. Moral hazard has ensued as the major banks don’t have an incentive to hedge their bets conservatively because they’ve been branded “too big to fail.” Thus, the unregulated credit default swap market alone had grown to $42.6 trillion by 2007, roughly the household wealth of the U.S. It’s very easy to see that even a slight fluctuation in a market of that size can have dire consequences. Unfortunately, the real estate market collapsed, and then the financial system, due to a few underlying circumstances. Many people bought homes that were priced well beyond their means. They were able to do so because several mortgage lending companies enabled them with a wink and a nudge via various types of disreputable loans, such as “liar loans.” A liar
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