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The banks’ secret endgame

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Re: The banks’ secret endgame

#21

Post by onebaddude »

marcosdumay wrote: post #20
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, aga…

>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.

When I buy stock in, say, Google or General Motors, whose money are they taking risks with? I didn't tell Google that I wanted them to put money into Uber, nor do I think it's a great idea. Too bad for me I guess.

And what do you mean "they pay for it"? Do you think when Joe Public defaults on his mortgage it comes out of the broker's bonus? No, the default risk is priced into every transaction the bank does. You and I and every other shareholder or bondholder pay for it.

Investing is investing.

Re: The banks’ secret endgame

#22

Post by retube »

marcosdumay wrote: post #20
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, aga…

> Retail banks take risks with their money

Huh? No! They are taking risks with YOUR money. When they lend on a mortgage, or make a corporate loan to a business they're doing that with YOUR deposits. This is how a savings account pays interest. They take your money, lend it at some interest rate and pay you a slightly lesser one. If the bank goes bust it's YOUR money which is lost: and this is why in most countries there are Federal Deposit Guarantees (i.e the govt will cover you up to some level if a retail bank goes bust)

Ironically this is precisely the OPPOSITE of the IB business model. They are NOT taking risks with your money: they fund in the money and debt markets, i.e they borrow the money to fund their activities.

Re: The banks’ secret endgame

#24

Post by chad_oliver »

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?

Culturally, they're a Western nation.

Re: The banks’ secret endgame

#25

Post by 001sky »

digitalengineer wrote: post #13
retube wrote: post #11

Earlier quoted context omitted.

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.

I'm not one to apologise for the post glass-stegal investment banks, but your're comment is confusing. Are you saying the banks tied the interest rtates on basic loans to companies purchases of other banking products? As a general rule, the financial crisis was caused by . Not by derivatives. The issue of derivitives is a more incidental role in the whole story. To use an analogy, something else caused the accident. Derivatives were like the airbag not deploying. Still a problem, but not in the way you are implying.

It is also arguably the case that loans were too cheap because the banks were like a supermarket selling one product at a loss (debt) to get customers in the store (so called "loss-leader" product). And then they took advantage of the less educated consumers (ie, selling derivatives to people that should have known better). This is of course, why glass-stegal was in fact originally law. To prevent ths type of bundling.

One thing this article fails to point out, though, is that the clinton administration got this model by copying it from the brits and europeans who long favoured the so-called "universal banking" model. so in that sense, its dis-ingenous to imply the usa was imposing or exporting this model via the WTO (it was the staus quo in Asia, too). For historical reasons, the continentals (eg, Germany), the Japaneese and others, never split off teh i-banks from the lending banks [1,2]. As a rsult, the CEOs of those combined banks were paid more than their US counterparts. This whole fiasco was driven by the US ceo's of the debt banks who were missing out on the windfalls accorded to the Investment Bank CEOs during internet 1.0 bubble. If you look at the history, the banks bought up the i-banks (as they had much larger balance sheets) and the CEO pay skyrocketed.

[1] https://en.wikipedia.org/wiki/Universal_bank [2] https://en.wikipedia.org/wiki/Keiretsu

Re: The banks’ secret endgame

#26

Post by kasey_junk »

digitalengineer wrote: post #13
retube wrote: post #11

Earlier quoted context omitted.

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.

Depending on the jurisdiction, lots of derivatives trading is subject to more regulation than cash products.

And what is not transparent about derivatives? Every one I've ever seen has a very specific and detailed contract. Some of them are complicated, but that's not the same thing as non-transparent.

Commodities futures are derivatives, and all of their contract specifications are available on the web, and easy to read by a layman.

Re: The banks’ secret endgame

#27

Post by artiface »

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?

Everything is in the west of something.

Re: The banks’ secret endgame

#28

Post by danmaz74 »

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…

Over-enthusiastic mortgage lending was fueled by the securitisation of that debt through CMOs, which create this situation in which those who work in mortgages retail couldn't care less if the mortgage is ever repaid - all they need is to find someone who will buy the security. Who created CMOs? Who made billions from them - until the collapse? Who was opposed to any form of regulation in financial markets?

Re: The banks’ secret endgame

#29

Post by retube »

nissimk wrote: post #19
retube wrote: post #9

Earlier quoted context omitted.

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.

Sorry you are wrong. MBS is not classed as a derivative. As pointed out above it's actually a structured finance product. But anyway as a simple sum of underlying cash products it's still a cash product (you pay upfront cash equal to the notional of the instrument)

A stock option on the other hand is most definately NOT a cash product, although the underlying is. The stock itself is not traded , it's just a financial contract whose value is a function of the stock price.

Re: The banks’ secret endgame

#30

Post by b1daly »

001sky wrote: post #16
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…

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…

I appreciate the technical correction in the difference between derivatives and structured debt backed securities, I did not know of this important distinction. In any case I was responding to the contention that financial crisis of 2008 was driven by "overly enthusiastic" retail bank style lending practices.

By my lay persons reasoning it seems clear that the new forms of mortgage backed securities played a significant role in perpetuating the mortgage bubble, as their complicated structures enabled,at the least, shady practices on the part of the ratings agencies, loan originators, and banks.

Derivatives did have some role in the crisis, as they were at the root of the highest profile firm failure, AIG (credit default swaps).

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