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Though he doesn't address it in the article, this story illustrates one reason why financial language is intentionally obfuscated: "The traders negotiated a ne

Though he doesn't address it in the article, this story illustrates one reason why financial language is intentionally obfuscated: "The traders negotiated a new trade with OCM. It reached a new plane of creativity. Under the transaction, the offending transaction was canceled at no cost to OCM. In its place was a new swap. The new transaction was for $600 million. Under the swap, for the next three years, OCM would pay a fixed dollar amount. The amount was $4 million a month. In return the dealer would pay OCM an amount calculated according to a complicated formula: Maximum of [0; NP x {7 x [(LIBOR2 x 1/ LIBOR) – (LIBOR4 x LIBOR-3)]} x days in the month / 360] Where NP = $600 million LIBOR = 6 month Dollar LIBOR rates The financial engineering was dazzling. There was just one problem. The complex equation, if you did the algebra, always equaled zero. The dealer would never pay OCM anything. OCM would be paying the dealer $4 million each month for three years. This was the intended effect." http://www.minyanville.com/businessmarkets/articles/traders-guns-and-money-libor-satyajit/9/10/2010/id/30021?page=full http://www.minyanville.com/businessmarkets/articles/traders-...

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arethuza 10y ago
Surely the client in such a deal should be sophisticated enough to do the calculation themselves and realise that the trade was never going to make them any money?
- crdoconnor 10y ago
  Sure. Why not. If we make the assumption that fraud can't exist, we might as well make the assumption that the principal/agent doesn't exist, corruption doesn't exist, naivete doesn't exist and clients who miss minor details don't exist.
  - arethuza 10y ago
    If they committed fraud then the client could go to the police, if they simply didn't read the contract they were signing up for then that's their fault. NB Obviously this doesn't apply to consumer contracts, but if you are making trades that big presumably you should know that you are swimming with sharks and act accordingly.
- neffy 10y ago
  From the article, the client was facing bankruptcy and would probably have signed anything that - I´m guessing Goldman Sachs, since apparently none of the big legal firms was prepared to touch the case - put in front of them. But even if that wasn´t the case, a lot of finance is essentially "robbery by math", by people who can do complicated calculations and figure out ways to route things around the financial system with weird financial instruments, from people who can´t, and who also have the Donald Duck $ sign in front of their eyes blinding them.
  - maxerickson 10y ago
    For that example the premise would then be that an organization large enough to throw away $48 million a year is incapable of seeking a sophisticated agent that will act in the interest of the organization. Maybe the problem is that such an agent doesn't exist. But if such deals are really commonplace it's a pretty sweet opportunity for there to be no one taking advantage of it.
    - neffy 10y ago
      Blatant cancelling issues, one would certainly hope so - but the original structure that got them into trouble was much more problematic. (Similar to some of the shenanigans within the US btw. that got a few counties into trouble.) fwiw - the ability to think through that kind of structure appears to be a lot commoner in computer scientists and similarly trained engineers, than it does in economist/finance types - but even there, it´s not exactly common. You have to be able to juggle inverse foreign exchange relationships against some knowledge of trading and banking relationships within and between countries, and project over time. It´s a distributed systems problem if you think it through - and we all know how easy those are to troubleshoot.
tvanantwerp 10y ago
First thing I would do if I worked for OCM would've been to plug that formula and some historic data into Excel. That's gross negligence if nobody did that.
kasey_junk 10y ago
I completely agree with your overall point, but in the OCM anecdote there was a near criminal level of incompetence on OCMs side as well. Their business became a currency swap business, literally they were not profitable without it, yet they did not know what a swap was.

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arethuza 10y ago

Surely the client in such a deal should be sophisticated enough to do the calculation themselves and realise that the trade was never going to make them any money?

crdoconnor 10y ago
Sure. Why not. If we make the assumption that fraud can't exist, we might as well make the assumption that the principal/agent doesn't exist, corruption doesn't exist, naivete doesn't exist and clients who miss minor details don't exist.
- arethuza 10y ago
  If they committed fraud then the client could go to the police, if they simply didn't read the contract they were signing up for then that's their fault. NB Obviously this doesn't apply to consumer contracts, but if you are making trades that big presumably you should know that you are swimming with sharks and act accordingly.
neffy 10y ago
From the article, the client was facing bankruptcy and would probably have signed anything that - I´m guessing Goldman Sachs, since apparently none of the big legal firms was prepared to touch the case - put in front of them. But even if that wasn´t the case, a lot of finance is essentially "robbery by math", by people who can do complicated calculations and figure out ways to route things around the financial system with weird financial instruments, from people who can´t, and who also have the Donald Duck $ sign in front of their eyes blinding them.
- maxerickson 10y ago
  For that example the premise would then be that an organization large enough to throw away $48 million a year is incapable of seeking a sophisticated agent that will act in the interest of the organization. Maybe the problem is that such an agent doesn't exist. But if such deals are really commonplace it's a pretty sweet opportunity for there to be no one taking advantage of it.
  - neffy 10y ago
    Blatant cancelling issues, one would certainly hope so - but the original structure that got them into trouble was much more problematic. (Similar to some of the shenanigans within the US btw. that got a few counties into trouble.) fwiw - the ability to think through that kind of structure appears to be a lot commoner in computer scientists and similarly trained engineers, than it does in economist/finance types - but even there, it´s not exactly common. You have to be able to juggle inverse foreign exchange relationships against some knowledge of trading and banking relationships within and between countries, and project over time. It´s a distributed systems problem if you think it through - and we all know how easy those are to troubleshoot.

tvanantwerp 10y ago

First thing I would do if I worked for OCM would've been to plug that formula and some historic data into Excel. That's gross negligence if nobody did that.

kasey_junk 10y ago

I completely agree with your overall point, but in the OCM anecdote there was a near criminal level of incompetence on OCMs side as well. Their business became a currency swap business, literally they were not profitable without it, yet they did not know what a swap was.