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The banks’ secret endgame

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Re: The banks’ secret endgame

#11

Post by retube »

digitalengineer wrote: post #7
retube wrote: post #6

Why are investment banks casinos? what's so terrible about derivatives? They're not "pseudo" products, or any more "dangerous" than say a stock. Firstly derivatives have been in use for thusands of years - first employed to lock in prices for future crop harvests. Now millions of businesses rely on derivatives to manage fx exposures, commodity exposures, interest rate exposures and so on. Without recourse to such pro…

In my country borrowing for your company became incredibly difficult (if not outright impossible) if you didn't 'hedge' yourself using derivatives. None of the (AAA) banks like Rabobank explained what the risks of using these products were. They were sold as 'safe' interest-fixed products. Apart from that most were locked at the Euribor rate. You know, the one they forged...

Mis-selling of swaps and attempts at libor fixing are completely seperate issues. They have nothing to with, or precipitating, the financial crisis.

Re: The banks’ secret endgame

#13

Post by digitalengineer »

retube wrote: post #11
digitalengineer wrote: post #7

Earlier quoted context omitted.

In my country borrowing for your company became incredibly difficult (if not outright impossible) if you didn't 'hedge' yourself using derivatives. None of the (AAA) banks like Rabobank explained what the risks of using these products were. They were sold as 'safe' interest-fixed products. Apart from that most were locked at the Euribor rate. You know, the one they forged...

Mis-selling of swaps and attempts at libor fixing are completely seperate issues. They have nothing to with, or precipitating, the financial crisis.

You ask 'what's so terrible about derivatives? ' well their very non-transparant nature and lack of regulation and registration.

Re: The banks’ secret endgame

#14

Post by simonh »

b1daly wrote: post #8
retube wrote: post #6

Why are investment banks casinos? what's so terrible about derivatives? They're not "pseudo" products, or any more "dangerous" than say a stock. Firstly derivatives have been in use for thusands of years - first employed to lock in prices for future crop harvests. Now millions of businesses rely on derivatives to manage fx exposures, commodity exposures, interest rate exposures and so on. Without recourse to such pro…

>The financial crisis was born out of over-enthusiastic mortgage lending - i.e your basic retail product. Even lehman brothers, a classic IB, went down due to it's large commercial property portfolio which tanked in the crisis (again, nothing to do with derivatives). How can you possibly say this? It was mortgage backed securities (derivatives) and collateralized debt obligations (derivatives of derivatives) that wer…

It was the massively popular government policies of aggressively encouraging lending to people flatly incapable of replaying the loans. This was the problem. Of course they're doing it again. Promising people they can have a house that they actually can't afford is a huge vote winner. Rigging the market to make sure property prices go up, making home owners feel wealthier is a huge vote winner. Blaming nasty bankers for making it all go wrong also neatly avoids having to take any of the blame.

Take the Greek and Spanish economic problems. Spain was in massive property bubble mode for the entire 2000s. The Greek government was willfully deceiving both it's people and the EU about it's finances. We're expected to believe that these issues would all have worked out fine, and these economies would have naturally stabilized all by themselves if it weren't for the wicked machinations of the US treasury? Really?

Of course Lehmans and the other banks badly underestimated their exposure, but the regulators that are cracking down on the banking industry now and ticking them off for being so greedy, were themselves willfully ignoring all the signs of danger before the crash because it was politically expedient to do so. It was politically expedient because that's what the voting public wanted to believe. Nobody came out of the crash smelling of roses.

Re: The banks’ secret endgame

#16

Post by 001sky »

b1daly wrote: post #8
retube wrote: post #6

Why are investment banks casinos? what's so terrible about derivatives? They're not "pseudo" products, or any more "dangerous" than say a stock. Firstly derivatives have been in use for thusands of years - first employed to lock in prices for future crop harvests. Now millions of businesses rely on derivatives to manage fx exposures, commodity exposures, interest rate exposures and so on. Without recourse to such pro…

>The financial crisis was born out of over-enthusiastic mortgage lending - i.e your basic retail product. Even lehman brothers, a classic IB, went down due to it's large commercial property portfolio which tanked in the crisis (again, nothing to do with derivatives). How can you possibly say this? It was mortgage backed securities (derivatives) and collateralized debt obligations (derivatives of derivatives) that wer…

You're confusing structured finance and derivatives. While this may seem easy to do, its based on a simplistic inference of the english modifiers. The primary things that got the housing crisis going were variations of debt contracts. The parties to these contracts were borrowers (ie, home owners) and Lenders (banks, etc). It takes both sides to agree on entering the underlying contracts (eg subprime loans). There is real cash between the parties and real "services" being rendered in the sense of capital allocation in the economy. A derivative, on the other hand, is a contract between to parties that with the underlying assets, with respect to their initial deployment of capital. Example: a derivative on a stock, is not a contract between the stock issuing company and another thrid party; the derivative contract does not fund a business plan directly nor receive payment from the company per-se [1]. The controversy around derivatives and their regulation has to do with this disconnect, actually.

[1] Except incidentally.

Re: The banks’ secret endgame

#17

Post by 001sky »

speeder wrote: post #15
jacques_chester wrote: post #10

> But Lula's refusenik stance paid off for Brazil which, alone among Western nations, survived and thrived during the 2007-9 bank crisis. I guess Australia doesn't exist in conspiracy theories.

Australia is in the west?

Canada is doing pretty well too, if you need a more geographically literal example. Colloquilly, the anipodean democracies are considered "western" in their culture (as opposed to traditionally Asian).

Re: The banks’ secret endgame

#18

Post by redblacktree »

retube wrote: post #9
b1daly wrote: post #8

Earlier quoted context omitted.

>The financial crisis was born out of over-enthusiastic mortgage lending - i.e your basic retail product. Even lehman brothers, a classic IB, went down due to it's large commercial property portfolio which tanked in the crisis (again, nothing to do with derivatives). How can you possibly say this? It was mortgage backed securities (derivatives) and collateralized debt obligations (derivatives of derivatives) that wer…

An MBS is NOT a derivative. It's a cash product. Either way you're missing the point. Securitisation is just a way of funding lending. Whether you use deposits, borrow from the money markets, or securitise loans, the money to make those loans has to come from somewhere. Ultimately it was mortgage brokers and the retail banks (or retail arms of universal banks) that sanctioned these mortgages and lent money to highly…

Why would a mortgage broker care to do his due diligence, if he knows he'll sell the loan tomorrow, and take none of the risk of default? This is about incentives. Incentives that were bound to lead to excessive risk taking and an inevitable crash.

Re: The banks’ secret endgame

#19

Post by nissimk »

retube wrote: post #9
b1daly wrote: post #8

Earlier quoted context omitted.

>The financial crisis was born out of over-enthusiastic mortgage lending - i.e your basic retail product. Even lehman brothers, a classic IB, went down due to it's large commercial property portfolio which tanked in the crisis (again, nothing to do with derivatives). How can you possibly say this? It was mortgage backed securities (derivatives) and collateralized debt obligations (derivatives of derivatives) that wer…

An MBS is NOT a derivative. It's a cash product. Either way you're missing the point. Securitisation is just a way of funding lending. Whether you use deposits, borrow from the money markets, or securitise loans, the money to make those loans has to come from somewhere. Ultimately it was mortgage brokers and the retail banks (or retail arms of universal banks) that sanctioned these mortgages and lent money to highly…

Derivative does not equal swap. MBS is definitely a derivative. It's a bond whose price and cash flow is based on an underlying pool of loans. The mortgage loans themselves are not derivatives, but mbs are. Stock options are cash products and they are most certainly derivatives.

Re: The banks’ secret endgame

#20

Post by marcosdumay »

retube wrote: post #6

Why are investment banks casinos? what's so terrible about derivatives? They're not "pseudo" products, or any more "dangerous" than say a stock. Firstly derivatives have been in use for thusands of years - first employed to lock in prices for future crop harvests. Now millions of businesses rely on derivatives to manage fx exposures, commodity exposures, interest rate exposures and so on. Without recourse to such pro…

> Secondly, IBs are not casinos. They take risks, but so do retail banks

They are different things. Retail banks take risks with their money (if a lend doesn't pay off, they are the ones that pay for it), IBs take risks with other people's money.

In principle, there is nothing wrong with that, but IBs get money when they get positive returns for your investment, but don't suffer when the return is negative.

That, again, is not a problem by itself, but it's an incentive for the IBs to assume the highest risks they can find around. And if left unchecked, they do become casinos.

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