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> You certainly can witness that with municipalities that are close to going bankrupt because they bought instruments that backfired on them. That seems to be

by vostok 9y ago

> You certainly can witness that with municipalities that are close to going bankrupt because they bought instruments that backfired on them. That seems to be a story about corrupt hiring practices at municipalities. Maybe they should look into hiring the kid with the foreign name and funny accent instead of their high school buddy's kid. I'm sure they got screwed on all sorts of construction contracts too.

maxxxxx 9y ago
Maybe the bankers could stop selling things to people that don't understand them?
- vostok 9y ago
  First, I don't see how they (arguably more like a trader or a sales person than a banker) can possibly determine whether or not you understand the product. You don't generally expect car sales people to determine whether or not you really need a Ferrari or if a Toyota will do. Second, we all buy financial products that we don't understand and we generally benefit from them. Many people use fixed rate mortgages to buy homes and index funds to invest. I'd argue that they probably don't understand those products as they're relatively complex underneath the surface. This isn't financial advice, but I'd argue that they do benefit from using them.
  - uiri 9y ago
    Neither fixed rate mortgages nor index funds are particularly complex. The idea behind an index fund is that it invests in the components of an index. Generally, that is a specific basket of stocks or bonds. Stocks are perhaps the most straightforward financial instrument: pieces of ownership of a company. Bonds are a bit more complex, but they're just the right to repayment of a loan (principal plus interest). Complexity arises if the fund can't directly invest in the components of the index and most replicate it with other things instead but that's an implementation detail and an individual is perfectly capable of buying the individual components themselves if they're worried about that. A fixed rate mortgage is a loan with a fixed, compounding interest rate and a fixed term. The mortgage payment is determined based on an amortization schedule but that's an implementation detail - it could just as easily be monthly interest plus a fixed portion of the principal or something else.
    - vostok 9y ago
      By your standards, MBS are also not particularly complex. They're not that different from pools of mortgages. In fact they have a lot of similarities with index funds and tranches are similar to options on the index. The complexity is precisely in the details. How much is the pre-payment option on your fixed rate mortgage worth? How much is the embedded interest rate swap that differentiates a fixed rate mortgage from a floating rate mortgage worth?
- WJW 9y ago
  They could, but not everyone that wants them understands that they do not understand them.

by vostok 9y ago

maxxxxx 9y ago

Maybe the bankers could stop selling things to people that don't understand them?

vostok 9y ago
First, I don't see how they (arguably more like a trader or a sales person than a banker) can possibly determine whether or not you understand the product. You don't generally expect car sales people to determine whether or not you really need a Ferrari or if a Toyota will do. Second, we all buy financial products that we don't understand and we generally benefit from them. Many people use fixed rate mortgages to buy homes and index funds to invest. I'd argue that they probably don't understand those products as they're relatively complex underneath the surface. This isn't financial advice, but I'd argue that they do benefit from using them.
- uiri 9y ago
  Neither fixed rate mortgages nor index funds are particularly complex. The idea behind an index fund is that it invests in the components of an index. Generally, that is a specific basket of stocks or bonds. Stocks are perhaps the most straightforward financial instrument: pieces of ownership of a company. Bonds are a bit more complex, but they're just the right to repayment of a loan (principal plus interest). Complexity arises if the fund can't directly invest in the components of the index and most replicate it with other things instead but that's an implementation detail and an individual is perfectly capable of buying the individual components themselves if they're worried about that. A fixed rate mortgage is a loan with a fixed, compounding interest rate and a fixed term. The mortgage payment is determined based on an amortization schedule but that's an implementation detail - it could just as easily be monthly interest plus a fixed portion of the principal or something else.
  - vostok 9y ago
    By your standards, MBS are also not particularly complex. They're not that different from pools of mortgages. In fact they have a lot of similarities with index funds and tranches are similar to options on the index. The complexity is precisely in the details. How much is the pre-payment option on your fixed rate mortgage worth? How much is the embedded interest rate swap that differentiates a fixed rate mortgage from a floating rate mortgage worth?
WJW 9y ago
They could, but not everyone that wants them understands that they do not understand them.