Monday, February 20, 2012

Greece, the end of the Euro and Risk mitigation

An article in today's FT drew my attention, how clients are asking their investment banks to create investment products that will protect them when/if Greece falls out of the Euro or the Euro ceases to exist (two option, one outcome).  Asking investment banks for this kind of advice smacks of stupidity.  First, because in the past, protection products have been better at generating fees for the arranger than at protecting the investors; think of portfolio protection in the early 90s.  Secondly, and more importantly, the issue with the failure of Lehman was not the direct consequences but the indirect ones!  It is the "Unknown, unknowns" that kill you, and that cannot be protected against.

A simple example, many companies would be looking at protecting core assets and revenue streams, but what if your bank goes belly up, not because it did anything really stupid, but because it had exposure to other banks that had stupid exposure -- the loops are endless.

The one protection is to own real assets that have little or no debt and good revenue potentials, even if the economic system collapses.  Non-cyclical COs with no or almost no debt, and lots of cash can ride out the storm.  After that, diversification, some cash will be lost, but diversification is almost certain to reduce total losses.  Finally, don't trust the banks, after all they've made a huge legislative push to stop you, the investor, knowing what they have invested into...


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