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Originally Posted by olivia
Exactly. The only ones taking the risk are you and I, and not willingly nor are we fully informed. The economic theory is (roughly) that banks no longer have to take risks - they can force people too.
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It appears to me that you are either misunderstanding financial risk and how to manage it in banking, or you are simply misconstruing the facts to make them fit your own hypothesis. If Goldman Sachs could control risk, then there would be no reason for them to try to manage it. There would be no reason for them to hedge against the loans going bad - they would just know which way the market was going and could put it all in that direction.
There is an amount of risk in everything. No matter what the investment or act in life, there is potential risk, and everyone (including banks) must manage the risk according to their risk profile (how much risk they're willing to take).
There's risk in skydiving and driving a car. You're more likely to get in a car accident than a skydiving accident, but most people choose not to skydive because potential failure almost certainly results in death where as a car accident might not.
Whatever risk involved in life, financial or otherwise, there is a certain amount of rolling the dice. Playing with probabilities. Would you rather a bank simply gambled away without contingency plans and preparation (i.e., hedging against potential loan losses), or would you rather they just place all their money on one number, cross their fingers, and hope that they're right?
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Originally Posted by olivia
Look up the history of Montana Power and Light. It was one of the most efficient, cheapest sources of energy in the country until the bankers with their investors convinced the state gov't to make it public and deregulated. Now it's a disaster. Power costs as much as 10X what it used to. The company stock is worth shit so the casual investors lost money...except those first investors and bankers who were on to the scheme.
Yep, they hedged their risk, those bankers, through the over-valuing, selling short, then crashing a good company.
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How is this hedging risk? You're comparing apples and oranges. I looked up Montana Power and Light briefly and came across this:
Who Killed Montana Power? - 60 Minutes - CBS News
Apparently, the CEO wanted to get out of the power business and into telecom and basically sold off the assets of the company to do so:
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The company's plan was to take the $2.7 billion dollars raided in the sale of Montana Power's assets, and literally bury the profits in the ground.
The new company, Touch America, was going to lay a 26,000-mile fiber optic network that would carry voice video and data transmission across a dozen western states. It was the brainchild of Montana Power/Touch America CEO Bob Gannon, who was born and bred in Montana.
Why does Morrison thinks that Gannon and Goldman Sachs decided to get out of the energy business and into telecom?
“He was tired of what he thought was a stodgy utility stock. He owned an awful lot of shares. And I think he wanted to be the Bill Gates of Montana,” says Morrison. “I think he wanted to get into a high flier situation where he could go to a $100 a share instead of sit there at $30. With Sachs, Goldman Sachs, it was simply money.”
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Yeah, sure the investment bankers will advise you in how to reach your goal. And sure, state regulated energy prices are "one of the most efficient, cheapest sources of energy" in one of the sparsest populated states with excellent mountains and rivers for water power.
And how is this supposed to be analogous to Goldman Sachs and financial risk management? This is simply a story of everyone catering to the CEO's dreams and his dreams cratering.