yes. say you're an insurance co. writing fire insurance on 10,000 homes. your risk is spread far and wide - it is very unlikely that the 10,000 homes will all burn down at once, unless they're all in the same spot.
credit/derivatives risk is different, because it has a systemic risk component. a failure by one big player can develop into a chain reaction taking down everyone.
the 40 trillion dollars in notional value in derivatives outstanding at the 8 largest US banks are not stress tested, as they have been built up during the seemingly unending boom. every contract looked at in isolation seems reasonably netted, or hedged, as the primary function of derivatives is actually to offload risk. but no-one can hedge against the systemic/counterparty risk.
more to the point, WS has for years created all sorts of asset backed debt paper, whereby e.g. subprime credit card receivables would be bundled by a financing co. on the Cayman Islands, and sold back into the secondary market as a double/triple A rated security, imbued with a credit guarantee by the likes of MBI (or Citi, or ABK, etc...). this allows the issuer to profit from the spread. since it looks like free money, lots of these transactions have been done, flying well outside the ambit of the regulatory radar. however, all this has been done while the boom was very much intact. so you see, we are probably looking at the tip of an iceberg, with which the Titanic is about to collide. |
