TALK TO BANKERS a lot and, after a while, you realize that what they don’t say is usually much more important than what they do say. Ask about their exposures to a certain class of risk – interest rate risk, say, or credit risk – and bankers will likely talk a lot about portfolio diversification, balanced long and short positions, hedges. They probably won’t mention what they’re actually worrying about themselves – being massively long volatility, say, or heavily exposed to basis risk.
Right now, investors want to hear that banks have put the worst of the credit losses that began with sub-prime mortgage-backed securities behind them. But banks are talking instead about their robust capital levels, improved liquidity, strong earnings from investment banking, reduced borrowing costs, and potential profitability in mainstream banking when earnings normalize.
And all this – along with implicit and...
