November 08, 2005

Disasters in waiting with banks playing hide and seek

Ivar Simensen in his report on November 4, "CDS leveraged loan hits the market" describes the appeal of the product as follows. “Many [bank portfolios] have exposure to names they may not be entirely comfortable with but hold in order to maintain business relationships. Now this exposure can be hedged out”.

Sir, I ask, if the banks with their credit analysts and their direct business relationship do not feel entirely comfortable with the risk, who should? This is exactly what is wrong in the current development were markets are allowed to play hide and seek with risks, with big disasters just waiting to occur. On the contrary, it could be much healthier for the financial system if the banks were simply not allowed to hedge at all their direct lending risks, except perhaps by the sale of participations to other banks.