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Blame it on Rio (Risk Ignorant Outlook); blame it on derivatives
The increased usage of derivatives is not the sole reason for the recent spate of debt write-downs by the likes of Merrill Lynch, Citigroup, Countrywide, etc. Invariably, the unmitigated quest for profit, combined with a myopic short-term investment focus, mixed in with whirling devirish volatility and the lack of ability to redistribute risk despite the incomprehensible array of hybrid derivatives products, were the "perfect storm" for calamity.
Derivatives have become a bewildering, complex, sometimes nonsensical financial instruments, whose intrinsic value is only on paper, vacuous, as the underlying cash or security has been so sliced and diced and tranched and mezzanined and senior this and equity that to the point that the best minds and quants at MIT, Stanford and the leading IB's on Wall Street could not price or value them with any certainty
The "Chinese Wall", or should I be more politically correct and say, the "firewalls" that once existed to separate banks, brokers and insurance and assurance entities before the Glass-Steagall Act was effectively repealed in the late 90's, has made for some very questionable bedfellows, passing around mortgage-backed securities like appetizers to each other and leaving the crumbs of the feast to be cleaned up by the wait staff.
Think Fannie Mae.
Not only how they failed in their accounting for derivatives "off-balance sheet" by not marking-to-market, but the tawdry business of "making markets" in mortgage-backed securities, in effect selling the products and buying them back in unrecognizable, grotesque form, and stating them in the journal entries at original value, P&L reflecting inordinate profits.
If only I could do that with my own bank account.
I wouldn't have time to write this article, for I would be in a villa somewhere on a tropical isle.
c. 2007 Phil Green
The increased usage of derivatives is not the sole reason for the recent spate of debt write-downs by the likes of Merrill Lynch, Citigroup, Countrywide, etc. Invariably, the unmitigated quest for profit, combined with a myopic short-term investment focus, mixed in with whirling devirish volatility and the lack of ability to redistribute risk despite the incomprehensible array of hybrid derivatives products, were the "perfect storm" for calamity.
Derivatives have become a bewildering, complex, sometimes nonsensical financial instruments, whose intrinsic value is only on paper, vacuous, as the underlying cash or security has been so sliced and diced and tranched and mezzanined and senior this and equity that to the point that the best minds and quants at MIT, Stanford and the leading IB's on Wall Street could not price or value them with any certainty
The "Chinese Wall", or should I be more politically correct and say, the "firewalls" that once existed to separate banks, brokers and insurance and assurance entities before the Glass-Steagall Act was effectively repealed in the late 90's, has made for some very questionable bedfellows, passing around mortgage-backed securities like appetizers to each other and leaving the crumbs of the feast to be cleaned up by the wait staff.
Think Fannie Mae.
Not only how they failed in their accounting for derivatives "off-balance sheet" by not marking-to-market, but the tawdry business of "making markets" in mortgage-backed securities, in effect selling the products and buying them back in unrecognizable, grotesque form, and stating them in the journal entries at original value, P&L reflecting inordinate profits.
If only I could do that with my own bank account.
I wouldn't have time to write this article, for I would be in a villa somewhere on a tropical isle.
c. 2007 Phil Green
