How Big Is the “Environment” You Stress Test Against

A fascinating article in the NY Times explains just how interconnected financial markets can be. Partial defaults on some corporate bonds triggered a chain reaction that eventually affected a school district in Whitefish Bay, Wisconsin, the NYC transportation authority, a bank in Ireland, and its parent bank in Germany.
The school district stands to lose nearly all of a $200 million investment which they were promised would only lose value if “15 Enrons” happened at once (oops). Interest rates skyrocketed on seemingly unrelated NYC transportation bonds, leading to a $900 million shortfall (hello taxpayers…). Many of these losses ended up at the feet of an Irish bank and eventually to its parent bank in Germany who was the recipient of a multi-billion bailout from the German government.
The school district is looking at cutting art and drama classes to make up for the shortfall (purchases, jobs, etc.). Local trends are not going to predictable for a while. The “environment” you have to consider when developing stress testing scenarios is getting bigger.
How are you developing your stress testing scenarios? Leave a comment below or email me.