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Increased marketing for deals on terms so favorable to the client that there is no way they could make a profit. Usually when they rope in these clients, they

Increased marketing for deals on terms so favorable to the client that there is no way they could make a profit. Usually when they rope in these clients, they then book 'future revenues' on them against their current losses.

shostack 10y ago
Depending on the risk of what is being sold here, is this always necessarily a bad deal for the clients? Or could they try to cover their losses on one product by marketing favorable terms on a different product that might perform well? Not sure if that's worded the best way--still learning about how the accounting for this works.
- tsunamifury 10y ago
  If you're buying a product, sure you can make out like a bandit. But in this case its a contract that can stretch into unforeseen consequences. For example you get a loan on X terms with Y seller. Y seller goes out of business (due to being a pyramid scheme) and now your contract is sold to the highest bidder to satisfy investors in bankruptcy court. You now hold X contract with Z seller who may be strongly incentivized to take advantage of any terms in your contract that allow for changes. In order to make out you need to satisfy the terms of Y seller's contract before they fold -- and balancing the incentives vs unknown risk of Z at unknown time, its probably not worth your time. The exception to that is: You have enough capital to sign a contract so big it actually forces Z event, then have the political clout to make sure the court rules in your favor rather than the investors. All the while also buying insurance against Z event. Then you have something similar to Goldman Sachs' profitable moves during and after the Great Recession.
  - shostack 10y ago
    Really great explanation--thanks for sharing. Are there any good sources you'd recommend for reading up more on this, or search queries I might want to try?
    - tsunamifury 10y ago
      The Big Short (Book) is the easiest way to be introduced to these concepts of contracts and risk. 'Margin Call' is an excellent and thrilling film that dramatizes these concepts and shows how they can play out on the trading floor.
      - shostack 10y ago
        Saw The Big Short movie--does the book go into much more realistic (ie. non-Hollywood) technical detail? Will check out Margin Call. What about outside of huge industry shifts like The Big Short portrayed? I'm most interested in how this plays out in the day-to-day when there isn't a huge industry-wide scandal at play.

shostack 10y ago

Depending on the risk of what is being sold here, is this always necessarily a bad deal for the clients? Or could they try to cover their losses on one product by marketing favorable terms on a different product that might perform well? Not sure if that's worded the best way--still learning about how the accounting for this works.

tsunamifury 10y ago
If you're buying a product, sure you can make out like a bandit. But in this case its a contract that can stretch into unforeseen consequences. For example you get a loan on X terms with Y seller. Y seller goes out of business (due to being a pyramid scheme) and now your contract is sold to the highest bidder to satisfy investors in bankruptcy court. You now hold X contract with Z seller who may be strongly incentivized to take advantage of any terms in your contract that allow for changes. In order to make out you need to satisfy the terms of Y seller's contract before they fold -- and balancing the incentives vs unknown risk of Z at unknown time, its probably not worth your time. The exception to that is: You have enough capital to sign a contract so big it actually forces Z event, then have the political clout to make sure the court rules in your favor rather than the investors. All the while also buying insurance against Z event. Then you have something similar to Goldman Sachs' profitable moves during and after the Great Recession.
- shostack 10y ago
  Really great explanation--thanks for sharing. Are there any good sources you'd recommend for reading up more on this, or search queries I might want to try?
  - tsunamifury 10y ago
    The Big Short (Book) is the easiest way to be introduced to these concepts of contracts and risk. 'Margin Call' is an excellent and thrilling film that dramatizes these concepts and shows how they can play out on the trading floor.
    - shostack 10y ago
      Saw The Big Short movie--does the book go into much more realistic (ie. non-Hollywood) technical detail? Will check out Margin Call. What about outside of huge industry shifts like The Big Short portrayed? I'm most interested in how this plays out in the day-to-day when there isn't a huge industry-wide scandal at play.