Excessive risk-taking with no effective risk-management can kill the bull. The current crisis is a good case-in-point. Nevertheless, to make a higher return on your investments, you need to take more risks. If you want to make $6.65 billion in bonuses in one quarter year (or a boat load of money), you need to go all out. Unfortunately, buying U.S government Treasuries is not going to get the job done.
As an example, we’ll use infamous, unloved Goldman Sachs. Putting all conspiracy theories aside about front-running trades in the New York Stock Exchange and having “bought out” the Treasury, Goldman Sachs shows that it is willing to put some substantial capital at risk.
If you look at the graph below from the first quarter of 2009, we can see that Goldman Sachs had more credit risk exposure (by a very wide margin) than any other bank in their league. Typically, if there is no blowup, more risk means more reward. Their second quarter earnings and $6.65 billion in bonuses seem to fit the picture. Now, just look at the bars for Goldman Sachs, that’s no joke risk-taking.
Click on image to see full-sized graph
*This graph comes from the Office of the Controller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities First Quarter 2009.
But remember that in the banking system profits are privatized while losses are socialized (i.e. taxpayer eats up the bill when things go wrong). All you need to do is look at the history of banking crises (including the current one) and see what always happens. Unfortunately, you don’t have the same privileges and you won’t receive bailouts if you take excessive risk, make the wrong bets, and then lose all your money.
{ 2 comments… read them below or add one }
1 thing though, i wonder what my mom would think of this idea
alexandria,
you’re mom may not quite like the idea
.
But I was looking at your blog, and it seems like you deal with FOREX; therefore, I don’t think you can get riskiER than that!
And don’t get your mom into that ! :p