Deriving the Value of the Risk

In the quest for short-term profit, means have emerged to derive current value from the perception of future risk.

The perception is not limited to deriving the value itself to assume a useful, current value, but to also control the perceived liability of the distributive risk to the reward.

Mark-to-market accounting, for example, a favorite tool for Enroning your way to success, affects the perception of the risk by projecting it forward with current value.

Though the current value has useful presence, the future is much more uncertain. The feedback can have a disorderly effect from which current value can be derived.

The volatile value of the risk leads to "making markets" and the systemic importance of firms like Goldman Sachs and Bank of America who are so big they can determine the value of risk derived from the markets they make.

It is the size of these firms that makes them powerful, so powerful that they can govern the risk for everyone else. Both investing and trading is reduced to guessing where the big money is going next to make and mark the market, and markets will be made depending on the position taken.

The reason trading ranges are so broad is because the market is being manipulated for the short term gain of derived risk value. If your costs are highly energy dependant, for example, the probability of risk is so high you are likely to engage the market makers to make the market for you. It would be naive to think the market will not be made to your detriment with a liability limited to proving the probability of the risk defended by a firm that has all your money and none of the risk.

The housing market is a visible demonstration of derived risk. Value has been generated on both the up and down side. The price differential has been generated by derivative financial instruments that transferred the risk to future value so that the value differential is simply: long on current value, short on future value.

The risk that generates the value (the boom and bust dynamic) is always present but has current value by the disposition of instruments for deriving value from the risk.

The value of the risk is largely time dependant, and it is the function of risk-transfer instruments (making markets) to time the market with certainty that is limited to the market maker. The result is both a zero-sum profit and a limited liability.

The value derived in zero-sum avoids the risk of liability since the value has the "assumption" of risk. The value derived, however, reflects the value of the risk whether it was actually assumed by the beneficiary or not.

Consider, for example, risk instruments designed to drive up home prices with easy credit without the investment in growth to pay the mortgages. You don't need a PhD to figure out how to derive value from the design (the making of the market) with virtually no risk, especially if the capital is so consolidated that the timing is in your control. The assumption of the risk is a fraud, and fraud is a crime, especially if it causes a detriment like The Great Recession.

Consolidation of the capital is the essential source of the value detrimentally derived, yet legislators consider it to be an asset, not a liability. Financial reform has been expressly identified as not being a function of organizational size. It is only a function of regulation, or the absence of it, according to the reformers.

This is a monumental mistake! The president can give speeches all day about how the Democratic Party's economic plan is obviously more practical than staying the Republican course, but without clearly identifying the size of the firm as the source of the problem, the derivative value of the risk is conserved. Only the timing changes; and since the timing of the value derived will be determined by government regulation, the derivative value will then have the legitimacy of public authority. Not only is the risk of liability reduced, but any retributive value can be blamed on government intervention.

The retributive value of the risk is then freely associated with government intervention and not a fundamental attribution of organizational size, except that government is too big.

What continues to ail us will be legitimately blamed on government intervention in the marketplace, but only as a derivative of that value. The value is actually derived from the allowable size of the firm and the consolidation of the risk.