Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

A Gross Problem


What we are living through is a system-wide disregard for gross exposures...

In reviewing Societe Generale's record trading fraud, this weekend's Economist suggested that the Bank's largest risk management failure was its focus on "net" exposures versus "gross" exposures. At the same time however, the article, in trying to comfort readers, goes on to suggest that this issue is unique to Societe Generale.

At the risk of raising the ire of fellow devout Economist readers, I would put out there that what we are living through is not just Societe Generale's failure, but a system-wide disregard for gross exposures across capital, liquidity, credit and interest rate risk management.

For example, over the past 6 months, we have learned, albeit the hard way, the difference between "net" and "gross" exposure to SIV's as close to $100 billion of assets moved on balance sheet.

We have also learned, again the hard way, how seemingly small "net" pieces of CDO's and mortgage securitizations can carry the entire credit exposure of far larger "gross" pools of loans.

And now we are about to learn the true distinction between "net" and "gross" exposure as the monoline insurers and the $47 trillion CDS worlds fall under the market's bright light and counterparties re-evaluate and, more importantly, re-measure, their risk positions.

Given the environment, investors large and small would be wise to step back and understand what exposures they are netting, and consider a broad range of "What if's?

As I have written previously, I believe that before the year is out, many investors will see that while their hedges were correct, their counterparties were not. And for some, that will be end up being a very "gross" problem.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos