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Complexity as rent

Guest from Satyajit Ras at Yves Place:

The complexity of modern derivatives has little to do with risk transfer and everything to do with profits. As new products are immediately copied by competitors, traders must “innovate” to maintain revenue by increasing volumes or creating new structures. Complexity delays competition, prevents clients from unbundling products and generally reduces transparency. Frequently, the models used to price, hedge and determine the profitability also manage to confuse managers and controllers within banks themselves allowing traders to book large fictitious “profits” that their bonuses are based on.

The sheer importance and size of derivative profits means that it will continue to attract the best and the brightest who will continue to play these time honoured games.

Warren Buffet once described bankers in the following terms: “Wall Street never voluntarily abandons a highly profitable field. Years ago… a fellow down on Wall Street…was talking about the evils of drugs…he ranted on for 15 or 20 minutes to a small crowd…then…he said: “Do you have any questions?” One bright investment banking type said to him: “yeah, who makes the needles?

Derivatives and debt are the needles of finance and bankers will continue to supply them to all the Dr. Jekyll’s and Mr. Hyde’s alike for the foreseeable future as long as there is money to be made in the trade.

Why don't we turn the banks into regulated public utilities?

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chicago dyke's picture
Submitted by chicago dyke on

the author was talking about health "care" legislation. as in, so deliberately confusing that no one is ever sure what they are paying for or why it costs so much.

but yes, as ponzi schemes go, this one has been masterful, and complexity is a big part of why. let's face it, it's also deliberately impossible to understand so that no one on wall st has to take any blame. i think i've even read that, some exec at a bailed out institution basically saying "well, how was i supposed to know? no one could understand how we got here."

responsibility: not for the Master Class. evah.

Submitted by lambert on

Since the same criminals are running the banks and the insurance companies, and managing their bailouts, it's not surprising that their methods are the same.

Samuel's picture
Submitted by Samuel on

it may be because you made a bad bet and lost - the fact you couldn't understand the product you invested in is ultimately the investors fault.

Now if the way you got to owning it is through tax incentives to dump portions of a your paycheck into a 3rd party managed pension fund...or if you're talking about the derivatives you own in the sense that they're on the Fed balance sheet, then I agree that is a crime made possibly only by governmental complicity

Samuel's picture
Submitted by Samuel on

Do you have a previous post that explains what you mean by this in more detail?

Wouldn't the likelihood of a bailout increase if bank reserves are furnished by the government? Not that Gov bonds to Fed magic money is not a terrible system...but aren't we still legislating/mandating counterfeiting if we let any central authority "set" interest rates in a fractional reserve system? What's to keep the banking bureaucrats from colluding with congress?