Page 49 - BANKING FINANCE SEPTEMBER 2015

ARTICLE

Risk is
where the
Business is

Dr B K Mukhopadhyay

A noted Management Economist and an
International Commentator on Business
and Economic Affairs (W B University)

T ony Robbins in his well known book 'Money: answers were; This just hasn't happened before. Yes, we
Master the Game" nicely described the trend are in uncharted waters. When one is in business one has
of happenings - 'The Great Depression, the to remember that business without risk is just akin to mak-
1973 oil crisis, the rapid inflation of the late ing omelets without eggs!"
'70s, the British sterling crisis of 1976, Black
Monday in 1987, the dotcom bubble of 2000, the housing Who thought that the airlines could compete with the rail-
burst in 2008, the 28% drop in gold prices in 2013 - all of ways? Nothing happens overnight. The overexpansion of
these surprises caught most of the investment profession- credit in the US housing market did not happen overnight
als way off guard, and the next surprise will have them on - the low Federal Funds rate between 2002 and 2005 al-
their heels again. That we can be sure of'. lowed many home owners to borrow, but the real prob-
lem was rooted in the mortgage lending practices in as
In the financial world, hedge fund manager, Ray Daliobe much as the mortgage lenders mistakenly believed that
rightly observed, "What kind of investment portfolio would they were taking on manageable risk during the period of
one need to have to be absolutely certain that it would low interest rates, because the values of the collateral
perform well in good times and in bad-across all economic underlying the loans were appreciating quickly.
environments?" Tony Robbins added, "all the fancy soft-
ware that the industry uses -the Monte Carlo simulations More specifically, the housing prices rapidly increased in the
that calculate all sorts of potential scenarios in the future last decade, and the mortgage lenders relaxed their lend-
-didn't predict or protect investors from the crash of 1987, ing standards as they believed that the seemingly ever-ap-
the collapse of 2000, the destruction of 2008, the list goes preciating values of these homes would be viably collateral
on. in case of default. The result is well known today.

If you remember those days back in 2008, the standard The real learning from these experiences led to at least

BANKING FINANCE | SEPTEMBER | 2015 | 49

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