Institutional investors who avoid the high risks of hedge funds often get caught up in risk anyway -- as witnessed by recent troubles at Bank of America, Union Bank of Switzerland and Bankers Trust Co. in hedge fund and other risky lending.
Banks, although the bulwark of the financial system, are fragile structures that can be abruptly shattered. One rogue trader blew up the venerable Barings PLC. Some banks might have risked a similar fate in lending to Long-Term Capital Management LP or other high-risk hedge funds.
The problem is information on lending risk often is not disclosed to investors in a timely fashion, although a few institutions made a belated effort after the Long-Term Capital bailout.
Shareholders should demand through shareholder resolutions or other appropriate action more disclosure of bank lending risk -- or seek a higher premium for the risks they face on stocks of those banks. Banks are no safe havens.
