<blockquote>
  <p>What would an investment bank have to gain by warning of an impending
  financial crisis?</p>
</blockquote>

<p>An entity might have an incentive to deceitfully alarm about an "impending crisis" if the entity's portfolio largely consist of positions which lead to profit when the price of other asset(s) goes down. Examples of such positions are <em>put options</em>, short selling of stocks, and certain side in interest rate swaps. The same applies if much of the entity's liabilities is positively correlated with the price of assets which are representative of the market.</p>

<p>The entity could hedge against the risk of a <em>generalized</em> fall by getting long positions in "very" Out-of-The-Money put options. Being far <em>OTM</em> implies that this protection for drastic scenarios is not significantly expensive. </p>

<p>Likewise, the rest of an entity's portfolio could also consist of assets deemed stable enough to withstand crises.</p>

CC BY-SA 4.0
2018-09-23T18:34:11.950Z
2018-09-23T18:34:11.950Z
Iñaki Viggers
<p>After reading <a href="https://www.bloomberg.com/news/articles/2018-09-13/jpmorgan-sees-liquidity-wildcard-in-gauging-depth-of-next-crisis" rel="nofollow noreferrer">a recent article</a> and a discussion with a friend, I was left wondering what an investment bank would have to gain by claiming that a financial crisis is coming.</p>

<p>I can see an obvious answer which is that by instilling fear in the market you can lower stock prices of shares that you would be interested in buying. However I find that this is a very dangerous game to play, because if the panic spreads, overall their portfolio would lose a lot.</p>

<p>Whether their prediction is accurate or realistic doesn't concern me. I just want to know what they'd gain if they did lie about it.</p>

CC BY-SA 4.0
2018-09-22T16:58:34.343Z
I'm sorry if this question is out of the scope of this SE, I'm not exactly sure what other website would have been appropriate.
VoidOutput
CC BY-SA 4.0
2018-09-22T18:24:37.383Z
I think it's a fair question! Though to clarify- are you specifically asking what a hedge fund might have to gain by lying about an oncoming crisis, or what they might have to gain by predicting a crisis, even if it's an honest assessment?
AndrewC
CC BY-SA 4.0
2018-09-22T19:04:32.920Z
My question was about the former (gains when lying) but I think an answer that addresses both perspectives could be very informative.
VoidOutput
CC BY-SA 4.0
2018-09-23T20:56:30.147Z
I believe you may overestimate the effect of one investment bank's warnings. My impression is that it would have no effect on the market and so there is nothing to gain or lose.
BB King
<finance><stock-market>
What would an investment bank have to gain by warning of an impending financial crisis?
VoidOutput
# What would an investment bank have to gain by warning of an impending financial crisis?

(Asked by: username_0 on 2018-09-22)

After reading [a recent article](https://www.bloomberg.com/news/articles/2018-09-13/jpmorgan-sees-liquidity-wildcard-in-gauging-depth-of-next-crisis) and a discussion with a friend, I was left wondering what an investment bank would have to gain by claiming that a financial crisis is coming.

I can see an obvious answer which is that by instilling fear in the market you can lower stock prices of shares that you would be interested in buying. However I find that this is a very dangerous game to play, because if the panic spreads, overall their portfolio would lose a lot.

Whether their prediction is accurate or realistic doesn't concern me. I just want to know what they'd gain if they did lie about it.

**Tags:** finance, stock-market
> **Comments:**
> **username_0**: I'm sorry if this question is out of the scope of this SE, I'm not exactly sure what other website would have been appropriate.  
> **username_1**: I think it's a fair question! Though to clarify- are you specifically asking what a hedge fund might have to gain by lying about an oncoming crisis, or what they might have to gain by predicting a crisis, even if it's an honest assessment?  
> **username_0**: My question was about the former (gains when lying) but I think an answer that addresses both perspectives could be very informative.  
> **username_2**: I believe you may overestimate the effect of one investment bank's warnings. My impression is that it would have no effect on the market and so there is nothing to gain or lose.  

---

## 1 answers

### Answer by username_3 on 2018-09-23. Score: 1 | Accepted answer

> What would an investment bank have to gain by warning of an impending
> financial crisis?

An entity might have an incentive to deceitfully alarm about an "impending crisis" if the entity's portfolio largely consist of positions which lead to profit when the price of other asset(s) goes down. Examples of such positions are *put options*, short selling of stocks, and certain side in interest rate swaps. The same applies if much of the entity's liabilities is positively correlated with the price of assets which are representative of the market.

The entity could hedge against the risk of a *generalized* fall by getting long positions in "very" Out-of-The-Money put options. Being far *OTM* implies that this protection for drastic scenarios is not significantly expensive.

Likewise, the rest of an entity's portfolio could also consist of assets deemed stable enough to withstand crises.


---

