Financial risk

“ As always, concerns about systemic risk are appropriately focused on large, highly leveraged financial institutions such as the GSEs that play substantial roles in the functioning of financial markets. I should emphasize that Fannie and Freddie, to date, appear to have managed these risks well and that we see nothing on the immediate horizon that is likely to create a systemic problem. ”

“ Secondly, because one of the risks, or expenses, of industrial operations is the risk or expense of what are commonly called bad debts, and every saving which can be effected in this liability is a diminution of cost of production; by dispensing with an item of outlay which in no way conduces to the desired end, and which must be paid for either by the consumer of the commodity, or from the general profits of capital, according as the burthen is peculiar or general. ”

“ But while under the individual system everybody charged for the risk of loss, the losses in reality fell on only a part, and so the rest got something for nothing. When insurance companies were organized to distribute part of the risks, making those who did not lose, contribute to make up the loss of those who did, the risks of all were diminished, and the profit and interest charges on that account reduced. ”

“ A man is facing business ruin who takes and consumes as profits from his plant what should be set aside for its upkeep and replacement. The same may be said of the payment to provide against risk, which may be called insurance. The amount of money which a careful business man sets aside from the unusual gains of prosperous years to secure himself against disaster from losses in lean years is not profit. ”

“ But while risk is always present in some degree, the degree varies enormously from one industry to another. Now, it is obvious enough that in an exceptionally risky industry, where there is a considerable possibility that the capital invested will yield no return at all, the profits of those concerns which succeed are likely to exceed the rate of interest on gilt-edged securities. ”

“ Therefore, in addition to the ruling rate of interest on capital, his profits must cover the cost of insurance on the capital risked--that is, there must be a prospect of gains large enough in case the venture succeeded to cover the risk of loss of capital in case of failure. ”

“ The company, of course, makes its underwriting or trade profit—or hopes to do so—by receiving more money in payment of premiums than it has to disburse, after deducting expenses, in losses. It must therefore accept its business as scientifically as possible. It must know how much money to risk—that is, how large a policy to write—on every class of risk in the world. When a line on a foundry and machine shop comes in, let us say, from Silas Osgood and Company, the underwriter is supposed to know how much premium, or rate, the risk should pay, and how many dollars the company can safely hold. ”

“ Finance cannot properly be held responsible for the exploits, good, bad or indifferent, of the man who, having made money at manufacturing, or mining, or in other commercial pursuits, blows into town, either physically or by telephone or telegraph, and goes on a financial spree, more or less prolonged. ”

“ III.21 The less the ratio of the value of the stockholders' interests to the value of liabilities to others, the greater is the risk of insolvency; the risk of insufficiency of cash is the greater, the less the ratio of the cash to the demand liabilities. In other words, the leading safeguard against insolvency lies in a large capital and surplus, but the leading safeguard against insufficiency of cash lies in a large cash reserve. Insolvency proper may befall any business enterprise; insufficiency of cash relates especially to banks in their function of redeeming notes and deposits. ”

“ Having their vast corporate stock and bond interest to protect, being engaged in constructing railroads, having created large debts upon their roads by reckless and dishonest watering of stock and loose issuing of bonds, they seek to compel all commercial and industrial pursuits to pay tribute to them, and they accomplish this object by controlling the currency of the country. A financial system that can be controlled by one interest, or in the interest of one class of men, is bad. ”

“ But what I have outlined happened, and has happened many a time before and since, and goes to prove my assertion that every financial institution which is taking the money of the people for the ostensible purpose of safeguarding it or putting it to use for them, is a part of the machinery for the plundering of the people. ”

“ Risky bets were made with other people’s money. Some folks made a lot of money taking advantage of consumers. It was wrong. And this irresponsible behavior on the part of some contributed to the worst financial crisis since the Great Depression. ”

“ Americans from all walks of life are continuing to feel the effects of the financial crisis. In recent weeks, concerns about the availability of credit, the safety of financial assets, and the volatility of the stock market have made many families understandably anxious about their economic future. ”

“ A collapse in the stock, which had been declining steadily, might seriously upset financial conditions all over the country, etc. Well, I weathered that and a couple others until I've got where I'm stumped. A bank has got the right to decide for itself what it wants to lend money on; it can decline a loan on any security or all securities offered, and what are you going to do about it? The trust companies are carrying all they can and besides they're being squeezed themselves. ”

“ In the course of my task I shall describe such parts of the general financial structure as will place my readers, especially those unfamiliar with its more complicated conditions, in a mental state to comprehend the methods by which the savings they think are safely guarded in the banks, trust and insurance companies, are so manipulated by the votaries of frenzied finance as to be in constant jeopardy. ”

“ I shall be pleased to execute all orders with which you may favor me on the above basis, in all securities dealt in on the New York Stock Exchange, reserving to myself, of course, the right to refuse to carry any security I do not care to loan my capital on. Some are risky, some safe, some inactive. All speculation implies risk. ”

“ The very severe and extensive liquidation that we have witnessed, not only in Wall Street but all over the country, has made the financial situation sounder and therefore safer than it has been for several years, for it must be confessed that many of our speculative captains of industry and finance passed far beyond the bounds of conservatism in their operations, and invited the crisis we experienced by their reckless assumption of inordinate risks and liabilities. ”

“ They are evident to all careful observers, and may be concisely summarized as consisting in: (1) the injustice to creditors through being paid in a much lower standard than that in which they lent; (2) the disturbance to trade, both domestic and foreign, by the fluctuations in the value of money; (3) the pressure on the working classes from the slower rise of money wages, in contrast with the quicker movement of the prices of commodities, resulting in a fall of real wages; and (4) the check to dealings in relation with the international money market, due to the risk of exchange fluctuations. ”

“ We found that the gross profit of capital might be distinguished into three parts, which are respectively the remuneration for risk, for trouble, and for the capital itself, and may be termed insurance, wages of superintendence, and interest. After making compensation for risk, that is, after covering the average losses to which capital is exposed either by the general circumstances of society or by the hazards of the particular employment, there remains a surplus, which partly goes to repay the owner of the capital for his abstinence, and partly the employer of it for his time and trouble. ”

“ The fall in the value of many stocks and securities held by the banks forces many brokers and speculators to convert their resources into ready money. This is the moment of danger; weak enterprises find their foundations crumbling, and there are many failures. [6] The falling prices, the shattered credit, and the financial losses force many factories to close, and many workmen are thrown out of employment. This moment of widespread loss is the crisis, It is followed by another period of low prices and of small output, and therefore of profits small or negative in many industries. ”

“ The from 250 to 300 or more failures each week tell a part of the workman’s trouble; another vast body of his losses does not go to record at all. It is the fifty-cents-on-a-dollar compromise system between wholesalers and retailers.
Workmen ought to get what consumers pay, less three per cent. on capital and about as much more for risk of ordinary kinds and a fair cost of handling goods. We maintain a system of extraordinary risks, called a credit system, which consumes two or three times as much as capital. ”

“ They cannot be blamed for it, nor do they deny it; and what interest must they charge to compensate the delay of 15 or 20 per cent. profit, the inconvenience of his advances breaking in upon his capital, and the risk attending other debts; all of which must comparatively fall upon the irregular customer: for whoever pays regularly can go from one to another after inquiring and comparing the prices at home or abroad. ”

“ But it was a crisis that began in our financial system. Large banks engaged in reckless financial speculation without regard for the consequences – and without tough oversight. Financial firms invented and sold complicated financial products to escape scrutiny and conceal enormous risks. And there were some who engaged in the rampant exploitation of consumers to turn a quick profit no matter who was hurt in the process. ”

“ The economic financial incubuses you have created now control your lives, from the day of your conception, until long after your death. With your money they directly control your most essential industries; and indirectly hold ownership through their loans, and mortgages, of your business, your homes, farms, stock, lands. ”

“ Though this objection is hardly worth answering to men of business, yet it looks something fair to them that know no better; and for the information of such, I trouble the reader with a few heads:
First, they must consider the insurer is out no stock.
Secondly, it is but one risk the insurer runs; whereas the assured has had a risk out, a risk of debts abroad, a risk of a market, and a risk of his factor, and has a risk of a market to come, and therefore ought to have an answerable profit. ”

“ Every one of these schemes only opens chances for money-jobbers and financial wreckers to operate upon brokerages and differences while making legitimate finance hazardous and expensive, thereby adding to the cost of commercial operations. The parasites on the industrial system flourish whenever the system is complicated. ”

“ The man who gets or accepts a rebate is taking a risk. ‘Well,’ he argues, ‘so is the man who buys wheat or stocks or undeveloped real estate of problematical future value.’ Quite right; but when you speculate you want to be sure that your probable or possible profits bear a fair proportion to the risk and your possible losses. It’s all right to make a secured loan of one thousand dollars at five per cent., but when you put your thousand into a scheme where there is a chance of losing every cent of it, you also 157 want a chance of making a good deal more than the legal rate of interest. ”

“ So many presidents of savings banks, even those belonging to the Young Men's Christian Association, run off with the funds; so many railroad and insurance companies are in the hands of receivers; there is so much bankruptcy on every hand, that all capital is held in the nervous clutch of fear. Slowly, but surely we are coming back to honest methods in business. Confidence will return, and then enterprise will unlock the safe and money will again circulate as of yore; the dollars will leave their hiding places and every one will be seeking investment. ”

“ From one point of view ... every economic crisis is a financial crisis. For since values are expressed in terms of money, and since the modern business superstructure is erected on the basis of credit, every economic revulsion expresses itself through the medium of a change in prices; and since the bank is the center of credit operations, every crisis inevitably involves a revolution in the conditions of credit. ”

“ The risk, which the producer runs until the commodity produced is actually consumed must also be borne in mind.637 There are things which are a real risk in small enterprises that by the intervention of an insurance company, or where the enterprises are large and insure themselves, become a more or less variable portion of the cost of production. The price of the product, in the latter instance, rises, by this means, very regularly. ”

“ This is the element of payment for risk, or rather the reward of risk-bearing. Risk is inherent in all business, as it is inherent in all life. The vagaries of nature and the vagaries of man are alike responsible. The farmer may find his harvest ruined by a drought or by a deluge; the coal or the gold, for the extraction of which you have perhaps set up an extensive mining plant, may come to an end which is unexpectedly abrupt. You may put your money into roller-skating rinks and find that cinemas have become the rage with the fickle public ”