The fun of covered bets

It is the period in which quarterly results of all kind are published. We have seen everything from enormous losses to amazing profits. In this moment of wealth redistribution I am having a strange feeling about too large profits. Why are people investing that much these days, why keep trading volumes going up every day if there is so much confusion in the market? Partly responsible is financial media who is not trying to make investors be more cautious. But by reading how Morgan Stanley made its profits I understood that they are risking a lot with the money the manage, so if it goes, either well or bad, it goes big time. However, this is not exactly what newspapers are writing about...

Reuters for example writes, as many newspapers, about the bank's involvement in risky trading operations, but does not bother to explain what pushes Morgan Stanley to do so. Instead a large part of the article is focusing on comparison with its 'chief rival' Goldman Sachs. The way this article is putting the news makes it look like these two investment banks are racing for the largest bonus pools and value-at-risk ratios (which for both are really high at 95%). This article gives the reader a lot of information, interviews with analysts and even the CFO, tons of certainly accurate numbers and also a good picture where and how Morgan Stanley positioned itself in the market and among its rivals. But it does not give the background I am looking for.

So I continued reading in on Bloomberg. They are obviously starting off with some numbers and ratios that support the title saying that the bank is beating the estimates. Typically for Bloomberg also surveys made among analysts about the estimates are included. This kind of information based on quantitative research is something that in my opinion looks really good in a financial article, especially nowadays. However, after interviews with the CEO, the CFO, analysts, portfolio managers and the comparison with major rivals Goldman Sachs and JP Morgan Chase as well as paragraphs about book value and fixed income, there was no more space for interesting background. My curiosity to find an answer about the WHY? of all this led me to....

....the Wall Street Journal. This article is much more focused on Morgan Stanley itself and gives a detailed overview of the development of the bank's shares trading at the New York stock exchange. It also includes comparison with the results form previous quarters this year which provide the reader with a good understanding of what happened. However, not with a why!! After useless reading through more articles in The Financial Times, The New York Times, BBC and the Guardian I decided to think about it and find an answer myself:

In the race for the highest profits and ROIs banks are looking for the riskiest trades they can get out there and do not really worry about a thing. Probably this is because in the back of there heads they know that if anything goes wrong, the FED will back all their losses and give their trading desks some more billions until they are healthy again. Isn't it beautiful to be too big to fail?

Sources:
http://www.reuters.com/article/BROKER/idUSN2143290720091021?sp=true
http://bloomberg.com/apps/news?pid=20601087&sid=adpXZLj_1P.U
http://online.wsj.com/article/SB125612022489198637.html#articleTabs%3Darticle