Thursday, July 19, 2012

Investors Becoming More Risk-Averse

The Great Recession triggered what appeared to be a significant response from legislators who enacted laws to curb the risky behavior of banks and lenders in an effort to instill more confidence in the U.S. financial system. Even so, investment patterns indicate many investors don’t believe much has changed at all and recent headlines bear out their concerns. As more big banks get drawn into the Libor rate-fixing scandal and shareholders reel from dangerous speculation at JPMorgan Chase and brokerage fraud in Iowa, taking on risk seems like a dangerous prospect for more and more investors. For more on this continue reading the following article from Iacono Research.

This Reuters report has a pretty concise summary of the many recent events that have combined to make investors skittish about taking on risk and turning a skeptical view of Wall Street and big banks into one of outright mistrust. That certainly helps to explain why Treasury prices were bid so high today that yields were pushed down to their lowest level since sometime in the 1800s (!?!).
It wasn’t supposed to be like this.

After the worst financial crisis since the Great Depression almost took the global economy over a cliff, tough new regulations and stronger internal controls at the world’s major banks were meant to help restore confidence in the financial system.
But recent headlines have some top investors and strategists questioning whether there has been any progress at all.

The horror stories include the deepening scandal that big banks rigged Libor, the benchmark international lending rate; JPMorgan Chase’s mounting losses from disastrous credit bets and a possible cover-up attempt; and the disappearance of customer funds from Iowa futures broker PFGBest, discovered after its founder tried to commit suicide and left a note outlining a 20-year fraud.

Add in the problems surrounding the botched trading debut by Facebook as well as the insider trading scandal that led to the conviction of hedge fund managers and big name businessmen such as former Goldman Sachs director Rajat Gupta — and the picture isn’t pretty.
It wouldn’t be so bad, save for the fact that, after the financial crisis and Great Recession, reforms were supposedly passed into law that would prevent reckless operators of the the Wall Street casino from again threatening the global economy. Historians will surely look back at the 2008-2012 period and shake their heads at the response to the crisis by policy makers around the world.

This blog post was republished with permission from Tim Iacono.

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