A recurrent theme in Alan Greenspan’s speeches, either when he was head of the board of governors of the Fed or now in his capacity as an invited speaker, has been that the financial world has become in recent years a much more sturdy, much more robust and let’s say it, a safer place, because risk has been redistributed and has essentially found its way to the hands of the investors optimally fit to manage it.

There are two notions in Greenspan’s statement, neither of which in my mind is true. The first is that risk has been redistributed and the second is that it has found its way to the investors best fit to manage it.

The part that is certainly true is that securitization of debt has allowed debt to be repackaged, time-scheduled and customized in an infinite number of ways. To that extent, the tools required to redistribute financial risk have no doubt been created over the past twenty years. The additional condition that needs to be met is that risk has been therefore effectively redistributed. The fact is however that none of this repackaging and customization has prevented the glitzy debt instruments to end up in the portfolios of a somewhat restricted number of actors: life insurance companies, pension funds, hedge funds and foreign central banks. This means that – for all practical purposes – that immense potential for redistribution ends up in concentration in the same few hands.
Similarly for the notion that the current investors in these debt instruments are the optimal managers of their underlying risk. Let’s imagine for one second that these investors are all using securitization as the way for them to hedge some market position they need to hold otherwise and that they’ve found that way the ideal method for offsetting two types of risk while, hopefully, at the same time locking a small but risk-free profit.

But as we know very well, this is not the way things actually work: every one of the traders working for these investors holds a call option, getting a share of whatever profit she or he is making while being shielded from the losses … until she or he gets fired, that is.

Risk has been splintered no doubt, whether it has found its way to its safest havens is where Alan Greenspan and I may differ.