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Friday, October 20, 2006

Trading Perspective On The Recent Credit Suisse $120 Mil Loss

By Yaser Anwar, CSC of Equity Investment Ideas

Roger Ehrenberg talks about how MSM is blowing the Credit Suisse $120 million loss out of proportions. Roger, an industry veteran, explains the subtleties of the trading business, "Do you know how many bulge bracket Wall Street trading businesses have suffered a $120 million loss on a particular desk in a quarter (and we don't even know this to be the case - the loss in question is on a particular strategy)? I tell you how many - EVERY SINGLE ONE."

Roger thinks,"Brady Dougan, and CS are getting a bad rap. A $120 million loss on a trading desk, unless the loss was the result of poor controls or a rogue trader, is neither a show stopper nor something that warrants intense eyebrow-raising and upset stomachs. THIS HAPPENS TO EVERY FIRM."

I asked him, "If CSFP (Credit Suisse Financial Products) knew the risks they were taking, had good risk management tools at their disposal & their legacy excellence- does it all boil down to luck then?"

Roger replied, "it's not an issue of luck, it's an issue of portfolio management. If a desk isn't taking a $120 million hit now and again, and has billions of excess capital as most of these firms do, then they aren't taking enough risk. The issue of luck in the Taleb-Fooled by Randomness sense is completely different. The issue here portfolio construction, diversification, performance measurement over an appropriate time period and risk thresholds."

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