Passing Risk Onto Those Who Can't Manage It

from the the-scam-that-is-Wall-Street dept

Salon is reviewing two books that look at the concept of "risk management" on Wall Street. Basically, the suggestion is that "risk management" is what happens when people who understand risk much better pass the risk onto those who don't understand it at all. That's all that most complex financial instruments are really doing - wrapping up risk in ways that the buyers don't understand what's really happening. In some cases, this is considered fraud, as it was 300 years ago in the story covered in The Secret History of the South Sea Bubble, which recounts how the same process of passing on risk worked in the past. These days, however, the swindlers are apparently running the show, which is the story covered by Infectious Greed: How Deceit and Risk Corrupted the Financial Markets, showing how derivatives traders are creating impossibly complex products, that they know no one can understand. As the review points out, the scary part isn't how many people are taken in by all this - but how it's still going strong. Risk is continuously passed around - and it's usually heading in the direction of those least likely to understand it. And, as much as you pass stuff around, "somebody winds up holding the hot potato when the music stops."