

Banks Bundled Bad Debt, Bet Against It and Won - tokenadult
http://www.nytimes.com/2009/12/24/business/24trading.html

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motters
When you consider the human consequences of this sort of unethical behavior,
it's quite horrifying. It's like me selling you a car that I know is faulty,
then betting that you'll have an accident.

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ars
Investment banks seem to have two parts, one part is concerned with making
trades to benefit the bank itself. The other part is a broker that helps
clients with what they need.

I don't think the same bank should be allowed to do both. At the very least
there should be a firewall between the departments.

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gaius
No, in practice the same trader will make the trade and make another trade to
hedge against losing money on the first. That's normal.

What's _wrong_ here is acting in bad faith by selling known-bad investments.
At best it's insider trading, at worst outright fraud.

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yummyfajitas
Any time you sell a security, you are selling a security which you believe to
be a bad investment. If you buy at the bottom and sell at the top, the guy you
sell to will lose money.

Take their deal with Hudson Mezzanine. Goldman offered Hudson a bet: if the
housing market goes down, Goldman wins, if it goes up, Hudson wins. Hudson
lost. What's the problem?

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gaius
_Any time you sell a security, you are selling a security which you believe to
be a bad investment._

Firstly, that's not true if you're a "market maker" as many large banks are.
Secondly, it's not true if you are selling for a reason (e.g. you need the
cash to do something else with) or for a technical reason (e.g. you are an
index fund). Thirdly, so long as you are not actively misleading the buyer, if
he thinks it's worth that much, that's his call.

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anamax
>> Any time you sell a security, you are selling a security which you believe
to be a bad investment.

> Firstly, that's not true if you're a "market maker" as many large banks are.

Actually, it's always true. You sell things because someone else is willing to
pay you more for them than you think that they are worth to you. You buy
things because they're worth more to you than the money it costs to get
someone else to give them to you.

Yes, there are lots of reasons why your valuation is different than the other
party's, but the difference is why both of you are willing to do the deal.

> Thirdly, so long as you are not actively misleading the buyer, if he thinks
> it's worth that much, that's his call.

Absolutely. The buyer is willing to take the "profit", so he should be willing
to take the loss. (The seller has similar issues - if they sell for "too
little", that's their problem because they were willing to take "too much".)

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Eliezer
> Actually, it's always true

There are such things as "gains from trade", you know. Not all assets are
worth the same amount to all players! If you buy an asset that you think
anticorrelates with your other assets to reduce variance, you don't need to
think that asset is underpriced. And if you need to liquidate some of your
assets to return to shareholders or, heck, buy a house, we call that
"liquidity preference" and it means you don't necessarily think the asset is
undervalued, just that cash in hand is worth more _to you_.

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anamax
> Not all assets are worth the same amount to all players!

I wrote that trades happen because the parties value the relevant asset
differently (the one that starts with the asset thinks that the cash is worth
more than the asset to it, while the other thinks that the cash is worth less
to it), so "correcting" me by telling me that is curious....

> to think that asset is underpriced

I didn't say anything about "underpriced". I said that the two parties had
different opinions about the assets in question wrt themselves. They can both
be correct. (They can also both be wrong.)

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gaius
It's a fine line. If you insure your car are you "betting" that you'll crash
it? No of course not. But having insurance doesn't mean you can be reckless.
Your insurer wouldn't pay out - and neither should the various governments
that did.

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jeroen
single page link:
[http://www.nytimes.com/2009/12/24/business/24trading.html?_r...](http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1&pagewanted=all)

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nazgulnarsil
it's called moral hazard. it is well known in the insurance industry.

lately I've been struck by the obviously directly related tendencies to

A) ignore history

B) act like everything is new

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agent_blue
cunts

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agent_blue
obvious things don't need to be expanded upon.

