

Lenders ban old risky practices, only to come up with new ones - cwan
http://www.businessweek.com/print/magazine/content/09_33/b4143020536818.htm

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byrneseyeview
This article is flawed. Here's why:

CDS-linked credit lines are just another way to manage risk. If the risk of
the loan goes up, the interest rate rises. What this actually means is that
the bank can offer a _lower_ initial interest rate, knowing that their risk is
hedged.

Payday loans: if someone living paycheck-to-paycheck has their car break down,
should it cost them their job? Payday loans are a very effective solution to
short-term cash flow crises, and it's often much easier to pay back 10% more
money a week later than to, e.g., spend a week without a phone (and with a
black mark on your credit).

"Derivatives for small investors." Okay, YCers, let's get hypothetical: what
if instead of referring to malicious code as a "virus," people started calling
it "code." And then you read an article about how, e.g., "Apple is knowingly
shipping a new kind of computer which is _full of code_. Every application
available on the new computer uses code, and users will be forced to send code
to anyone they send an email to." That would be incredibly frustrating; this
is how the word "derivatives" feels to anyone involved in finance. Derivatives
are just contracts whose value is based on the something that varies. You can
use derivatives to reduce your risk, or to take on risk. In the case of
"structured notes," the derivatives are generally designed to reduce risk --
e.g. you'll get the S&P's return, less two percentage points, but with a
maximum loss of 10%.

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jerf
Is it just me, or is there just plain too much money? Having made all the safe
loans the market can take, these banks are left sitting on a still-giant pile
of money, which they can't just sit on. Combine that with the fundamental
inability of any single human to understand the effects of some of these loans
and it just doesn't matter what regulations you throw at the market; the banks
_will_ find a way to make loans that are as risky as necessary to avoid the
alternative of... well, _not_ making loans. That's just not thinkable.

Somehow, we've got to address the roots of the problem, not keep trying to
regulate the second- and third-order effects away.

~~~
Maro
A bank doesn't sit on a large pile of money, it facilitates the flow of money
from lenders to borrowers. Eg. if Microsoft makes $1bn in profits and wants to
invest the money it calls up Morgan Stanley, who in turn sells them these
"structured investments" --- which means Morgan Stanley passes the money on to
borrowers at an interest. If all goes well, Joe Sixpack doesn't starve 'til
his paycheck comes, so he "happily" pays the interest. Morgan Stanley keeps
some of the interest and pockets the premium, and at the end of the year
Microsoft has $1.1bn. Now, if Joe Sixpack defaults it's no big deal, because
there are many Joe Sixpacks. If too many of them default, then Morgan Stanley
would be in trouble and MS would loose their investment --- but what are the
chances of that happening...

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jerf
For the purposes of my post, lenders having money when the banks are unable to
provide borrowers is "sitting on a pile of money". The money may not "belong"
to the banks, but the effect is the same: Too much supply.

Explaining the banking system in precise terms was beyond the scope of my
post.

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JimmyL
>> If the economy keeps moving toward recovery, as many measures suggest, then
the new products might well work out for buyers and sellers alike.

Isn't this _exactly_ what they were saying when encouraging people to take out
ridiculous mortgages to buy homes? "As long as the market keeps rising, which
it will of course do, your value will keep rising and you can just refinance!"

And we all know how well tha-- oh, wait...

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recampbell
If banks are too big to fail, they should be prevented from pulling this kind
of stuff. If it's a truly profitable venture, spin off a startup to do it. If
the startup goes belly-up, bankruptcy can work its magic.

I don't see why the financial world can't do innovation like the technology
world, so long as I don't have to bail them out every April 15th.

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roc
Risk is fine. What's not fine, is the obfuscation of risk to the point of
fraud.

And my problem with pay-day loans stems solely from the fact that the vast
majority of pay-day loan 'customers' are already functionally bankrupt when
they start using these services.

They're just delaying the inevitable with these loans and the banks are only
too happy to eat the cost of the inevitable default if it means they can
collect 100-400% interest a dozen times before that.

Cap the rates and this loan-sharking will end.

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yummyfajitas
So instead of giving poor people a few months to get back on their feet, you
want to bankrupt them immediately?

~~~
po
Isn't the point of bankruptcy to wipe out all debts after they took too much
risk and/or just got unlucky? In theory that sounds better than giving people
a few more months to keep going with their too-much-risk-taking approach now
loaded with a new debt. I don't know if that's the way it works in practice,
but hell we're just all armchair economists anyway. ;-)

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Maro
Reminds me of the Batman line: "Why do we fall, sir? So that we might better
learn to pick ourselves up."

Difference being, it's the Joker who's getting up.

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scientifics
Something needs to be done to stop banks from taking advantage of people who
don't do their research or people who are going through a crisis and need
money.

