The Paulson Put

A cynic may say it merely adds to list of factors that incentivise banks to take too much risk:

- Skewed risk taking by individual traders – they share in the upside rewards of their successful trades and can they make millions in good years. However, these guys don’t put up their own money when things go bad and they start printing losses. In a worse case scenario the trader will get laid off.

- The old Greenspan Put – Is a crisis looming on the horizon? Don’t worry, the Fed is there to save the day by relaxing monetary policy. This may generate excess liquidity and merely shift the problem to a later date but we’ll deal with that later … by repeating the process over and over.

- The Paulson Put – The grand daddy of puts. Low interest rates no longer working? Banking system gummed up with so much crap collected over a decade or more of excessive risk taking? Don’t worry, just run ‘Paulson’s Financial System Anti-Virus’ software to extract and quarantine the crappy loans, and then press ‘Ctrl, Alt + Delete’ on the entire financial system.