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You're the banker, so you will know a lot more about this, but it appears to the layman that part of the point of developing all these derivative products is partly to spread the risk, but also to render it so complex and opaque that risk analysis becomes virtually impossible.  Bank stopped analysing the actual assets and traded on each others reputations (and credit ratings) instead, in much the same way as people buy brands because they have a good reputation (carefully crafted by the marketing people) but which may actually consist of very crappy product.

It is this dislocation between high finance and the actual productive economy which needs to be addressed because otherwise good businesses fail for lack of finance and bad business which are well marketed to financiers get all the capital.

Risk analysis is a skilled and expensive business and requires an understanding of the real world - if banks have a value, it is that they are good at allocating capital to worthwhile projects.  When they stop doing this they become no better than casino operators.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 07:54:27 PM EST
[ Parent ]
the point of developing all these derivative products is partly to spread the risk, but also to render it so complex and opaque that risk analysis becomes virtually impossible.

So on the one hand blame would be placed with people who designed the system this way. on the other it could be placed on people who misused the system in this way.

Surely this would be visible and provable by looking at either the amount of risk analysis staff, or the ammount of risk analysis paperwork produced in the derivative departments.  If the apropriate risk analysis wasn't built into the derivative departments as they started then it would show intent.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Mon Mar 23rd, 2009 at 08:11:19 PM EST
[ Parent ]
Jerome a Paris:
We are in a crisis to a arge extent because no riks analysis was performed on underlying assets, and one of the reasons this happened is that those that structured the financial instruments did not hold them - and did not really care if they were sound: they only cared if they were marketable, which is not the same thing.

Well Jerome is the banker here - if not a derivatives trader - and so I am taking his word for it - though to be honest, this is exactly what I would expect to have happened.  As I noted above, risk analysis if expensive and skilled, and if a bank wants to cut costs...

Also there is a more general trend in all businesses - the emergent dominance of the marketing department over production/engineering and even R&D.  Business now - and the larger and more complex it is - the more so - is all about managing perceptions - consumer, regulator, investors, bankers - and the actual reality of what is happening on the ground in terms of product quality is almost an irrelevance.  I would be surprised if banking were any different - and particularly the more exotic hedge fund and derivatives end of the business.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Mar 24th, 2009 at 08:14:18 AM EST
[ Parent ]

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