

The banks’ secret endgame - moeffju
http://www.gregpalast.com/larry-summers-and-the-secret-end-game-memo/

======
retube
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 products companies future cash
flows would be much less predictable and expose companies to material risks.
Contrary to what you might hear, derivatives ARE socially useful (e.g think
the S.Korean business who hedges his USD-denominated payroll liabilities).

Secondly, IBs are not casinos. They take risks, but so do retail banks (they
borrow short and lend long so you have a duration mis-match leading to credit,
liquidity and interest rate exposures). 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).

In all crises governments and the media need someone to blame. IBs are the
scape goat this time. But the reality is a heck of a lot more complex than a
simplistic "greedy IB assholes running amoke and stealing the world's wealth
with nasty derivatives".

Indeed all the regulation that's now been implemented is incredibly counter-
productive. It doesn't make banks safer (people can and will always make
stupid business decisions no matter how much regulation you deploy), it
increases costs and restricts lending - the very opposite of what's needed to
finance a return to, or increase in growth.

~~~
b1daly
>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 were the
main product that allowed excessive lending, by obscuring the true risks. It
was the markets for these securities that froze, causing the liquidity crisis
that drove the financial crisis.

~~~
retube
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
unsuitable people. Yes they were securitised and sold on but as I say above
this is just a funding mechanism. Yes the IBs have some responsibility for not
checking the quality of the loans but then there's an argument that should
have been done already by the retail side. And of course no-one imagined that
default rates would ever get as high as they did - which did wipe out some MBS
and CDO tranches resulting in large losses for the holders. As an indication
these types of issuance were typically stressed at default rates of 10% - and
that was considered extremely conservative. What actually happened was some of
these mortgage pools were so crappy default rates hit 80% or 90%.

~~~
nissimk
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.

~~~
retube
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.

------
MattBearman
Google cache works -
[http://webcache.googleusercontent.com/search?q=cache%3Awww.g...](http://webcache.googleusercontent.com/search?q=cache%3Awww.gregpalast.com%2Flarry-
summers-and-the-secret-end-game-memo%2F&oq=cache%3Awww.gregpalast.com%2Flarry-
summers-and-the-secret-end-game-memo%2F&aqs=chrome..69i57j69i58j69i60.2226j0)

------
pedrocr
The discussion of the vice post from yesterday:

[https://news.ycombinator.com/item?id=6260126](https://news.ycombinator.com/item?id=6260126)

------
moeffju
Apologies, I didn’t find this discussion from yesterday:
[https://news.ycombinator.com/item?id=6260126](https://news.ycombinator.com/item?id=6260126)
where the article is on vice.com.

------
jacques_chester
> _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.

~~~
speeder
Australia is in the west?

~~~
chad_oliver
Culturally, they're a Western nation.

------
jamesrom
Link is broken. Anyone have a mirror?

~~~
mipapage
Vice: [http://www.vice.com/en_uk/read/larry-summers-and-the-
secret-...](http://www.vice.com/en_uk/read/larry-summers-and-the-secret-end-
game-memo)

