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> it just shouts everything that went wrong with American Business, to me. Quite the opposite. Sound financial management implies financial engineering. I re

> it just shouts everything that went wrong with American Business, to me. Quite the opposite. Sound financial management implies financial engineering. I recommend you study and understand the field before criticising it; it's not "tricks" at all.

TheOtherHobbes 7y ago
Except when it is. See also Enron, the Trump "empire", Libor, gold price fixing, the 2008 crash, S&L, and many more.
- ryanjshaw 7y ago
  Fraud != financial engineering.
  - crispyambulance 7y ago
    GE was once a mighty company with amazing technology and R&D. Now they're a sad shell of what they used to be and consist of way too many bored finance people on a slowly sinking ship.
  - deleted 7y ago
    [deleted]
  - jhayward 7y ago
    Is that a definition, or a statement that financial engineering has nothing in common with fraud, or some other statement? From my view the greater the degree of 'financial engineering' in a company's P/L the greater the likelihood that some kind of fraud upon the investor or business partner is being conducted.
jacobolus 7y ago
As an uninformed outside observer, I have seen a large number of companies that used to pride themselves on product quality, customer support, and treating workers well get bought by private equity or other finance guys (or maybe sometimes just taken over from inside), shed everyone competent, focus on cost cutting and nickel-and-diming customers, and start producing garbage products with no support, transforming the relationship with customers into a largely adversarial one. In many cases the finance guys have (legally?) embezzled large amounts of money while loading the companies with debt and then dumped them, leaving customers, employees, suppliers, and other investors holding the bag. I’m sure this process is considered to be “sound financial management” by some.
- goatinaboat 7y ago
  Financial Engineering 101 - borrow some money, use it to buy a company. - transfer the debt onto the company. Now, somehow, you own the company but paid nothing for it. - break up the company, sell off the parts, keep the money. The company goes bankrupt and the original lenders get nothing - repeat. Bizarrely you can keep on doing this over and over again, people will still keep lending you the money!
- wskinner 7y ago
  What are your two favorite examples that illustrate this pattern?
  - notyourday 7y ago
    GE would be one. The other... EAK Ramen in NYC (small chain that landed here a couple of years ago out of LA so I'm sure it is financial engineering at work, not just an owner experimenting). They removed what used to be a standard part of the ramen that came with it ( egg, some toppings ) and started offering removed parts as "customize your own ramen! Add an egg for a $1! Add corn for a $1! Add X for a $1 ) as a way to raise prices by wrapping that into "customization". As if their customers are stupid and don't notice that the same ramen now costs not $14 but $18.
  - deleted 7y ago
    [deleted]
- geodel 7y ago
  I agree with what you said. I notice that 'engineering/engineered' term have positive connotation as opposed to 'doctoring/doctored'. But with this Financial engineering thing scam artists have taken over 'engineering' now.
- ryanjshaw 7y ago
  There seems to be an insane amount of misinformation and misunderstanding on this topic. What you and others are describing is not financial engineering. It's corporate raiding, fraud, etc. I'll list some examples in the field of financial derivatives (speaking here in my personal capacity, not an expert, this is not advice, disclaimer disclaimer disclaimer): * An oil production company knows they can comfortably operate at a particular price level, P/BBL. They're willing to forego any additional profits provided they can guarantee receiving P/BBL. Commodity swaps make this possible, and it means that people in the industry get to have a reliable job despite the volatility in the market. * The national airline of a small, poor developing country depends on tourists buying plane tickets in a foreign currency, often months in advance. How can they manage the risk of the exchange rate volatility, when one of their biggest costs are fuel and they have to pay this in yet another foreign currency? Currency derivatives make this possible, and it means this developing country can reliably operate an airline and thereby receive an economic boost from tourism, helping at least some of its citizens make it through another day. * The CEO of a F500 company knows some bad news is about to hit the market and negatively impact the value of his stock. But he can't sell his shares because he'll be guilty of insider trading. Instead he enters into an equity swap arrangement with some poor sucker who doesn't know about this bad news, and because it's a pre-Dodd Frank Act deal, nobody is the wiser, and our CEO gets to enjoy another stress-free day on the golf course. As I hope my last tongue-in-cheek example demonstrates, these are just instruments. How they get used and abused is a problem for regulators; they are not inherently evil.
rolltiide 7y ago
Tl:dr; nobody has studied the field and replies with a bunch of anecdotes about call center behavior, overleveraging, and credit cards. How is financial literacy so low that this stuff is even conflated with financial engineering? Lets talk about asset price valuations, share classes, open market operations, debt in subsidiaries...
hitekker 7y ago
For those momentarily misled by this condescending comment: > Despite its name, financial engineering does not belong to any of the fields in traditional professional engineering > It is generally (but not always) a disparaging term, implying that someone is profiting from paper games at the expense of employees and investors. >Many other authors have identified specific problems in financial engineering that caused catastrophes: Aaron Brown[23] named confusion between quants and regulators over the meaning of “capital”, Felix Salmon[24] gently pointed to the Gaussian copula, Ian Stewart[25] criticized the Black-Scholes formula, Pablo Triana[26] dislikes value at risk and Scott Patterson [27][28] accused quantitative traders and later high-frequency traders. https://en.wikipedia.org/wiki/Financial_engineering#Criticisms https://en.wikipedia.org/wiki/Financial_engineering#Criticis...
bumby 7y ago
I'm willing to guess the disagreement here is due to the definition what constitutes 'financial engineering'. I would say most laypeople would agree that using applied mathematics to hedge investments and reduce risk is okay. Most would probably also say that creating overly technical mechanism to obfuscate what is really going on would not be acceptable. I think this is why people cringe at the prospect of more and more derivative financial products being 'engineered' to create value. I personally say it gets gross from the standpoint that it is almost entirely a field of contrived rules of convenience. In other words, the 'system' is entirely human-created which comes with all the shenanigans humans bring to the table. This is in contrast to traditional engineering disciplines that are generally rooted in some sort of physics. A mechanical engineer can improve their understanding of reality, but cannot wave a magic wand and make different a different reality for their system to operate within.
- StanislavPetrov 7y ago
  You're right that the definition of "financial engineering" varies widely based on the interests and understanding of the parties flinging it around. One thing I'd like to point out that not all "financial engineering" involves complex mathematics. For example one of the most widespread instances of "financial engineering" across many if not most large corporations is the issuance of corporate bonds. While some corporations do this because they truly need the cash, most do so as a financial calculation based on their growth projections, the rates of returns on government bonds and other investments. The huge influx of cash raised by this sale of corporate bonds can then be used to buy back stock (inflating the stock price), paying a dividend or even taking straight cash payouts for executives. This all looks good on paper until growth projections turn out lower than expected, there is a disruption in the bond markets, currency markets or anything else that threatens to reduce the ability of the corporatation to make bond payments. This can lead to defaults, liquidation of company assets to pay bond holders or even bankruptcy. However, those executives and stock holders who made massive amounts of cash from the bond issuance, either directly or indirectly (through buybacks which artificially raised the price of the stock) walk away with all that money while the corporation itself (and the workers) are SOL.
  - 7y ago

TheOtherHobbes 7y ago

Except when it is. See also Enron, the Trump "empire", Libor, gold price fixing, the 2008 crash, S&L, and many more.

ryanjshaw 7y ago
Fraud != financial engineering.
- crispyambulance 7y ago
  GE was once a mighty company with amazing technology and R&D. Now they're a sad shell of what they used to be and consist of way too many bored finance people on a slowly sinking ship.
- deleted 7y ago
  [deleted]
- jhayward 7y ago
  Is that a definition, or a statement that financial engineering has nothing in common with fraud, or some other statement? From my view the greater the degree of 'financial engineering' in a company's P/L the greater the likelihood that some kind of fraud upon the investor or business partner is being conducted.

jacobolus 7y ago

As an uninformed outside observer, I have seen a large number of companies that used to pride themselves on product quality, customer support, and treating workers well get bought by private equity or other finance guys (or maybe sometimes just taken over from inside), shed everyone competent, focus on cost cutting and nickel-and-diming customers, and start producing garbage products with no support, transforming the relationship with customers into a largely adversarial one. In many cases the finance guys have (legally?) embezzled large amounts of money while loading the companies with debt and then dumped them, leaving customers, employees, suppliers, and other investors holding the bag. I’m sure this process is considered to be “sound financial management” by some.

goatinaboat 7y ago
Financial Engineering 101 - borrow some money, use it to buy a company. - transfer the debt onto the company. Now, somehow, you own the company but paid nothing for it. - break up the company, sell off the parts, keep the money. The company goes bankrupt and the original lenders get nothing - repeat. Bizarrely you can keep on doing this over and over again, people will still keep lending you the money!
wskinner 7y ago
What are your two favorite examples that illustrate this pattern?
- notyourday 7y ago
  GE would be one. The other... EAK Ramen in NYC (small chain that landed here a couple of years ago out of LA so I'm sure it is financial engineering at work, not just an owner experimenting). They removed what used to be a standard part of the ramen that came with it ( egg, some toppings ) and started offering removed parts as "customize your own ramen! Add an egg for a $1! Add corn for a $1! Add X for a $1 ) as a way to raise prices by wrapping that into "customization". As if their customers are stupid and don't notice that the same ramen now costs not $14 but $18.
- deleted 7y ago
  [deleted]
geodel 7y ago
I agree with what you said. I notice that 'engineering/engineered' term have positive connotation as opposed to 'doctoring/doctored'. But with this Financial engineering thing scam artists have taken over 'engineering' now.
ryanjshaw 7y ago
There seems to be an insane amount of misinformation and misunderstanding on this topic. What you and others are describing is not financial engineering. It's corporate raiding, fraud, etc. I'll list some examples in the field of financial derivatives (speaking here in my personal capacity, not an expert, this is not advice, disclaimer disclaimer disclaimer): * An oil production company knows they can comfortably operate at a particular price level, P/BBL. They're willing to forego any additional profits provided they can guarantee receiving P/BBL. Commodity swaps make this possible, and it means that people in the industry get to have a reliable job despite the volatility in the market. * The national airline of a small, poor developing country depends on tourists buying plane tickets in a foreign currency, often months in advance. How can they manage the risk of the exchange rate volatility, when one of their biggest costs are fuel and they have to pay this in yet another foreign currency? Currency derivatives make this possible, and it means this developing country can reliably operate an airline and thereby receive an economic boost from tourism, helping at least some of its citizens make it through another day. * The CEO of a F500 company knows some bad news is about to hit the market and negatively impact the value of his stock. But he can't sell his shares because he'll be guilty of insider trading. Instead he enters into an equity swap arrangement with some poor sucker who doesn't know about this bad news, and because it's a pre-Dodd Frank Act deal, nobody is the wiser, and our CEO gets to enjoy another stress-free day on the golf course. As I hope my last tongue-in-cheek example demonstrates, these are just instruments. How they get used and abused is a problem for regulators; they are not inherently evil.

rolltiide 7y ago

Tl:dr; nobody has studied the field and replies with a bunch of anecdotes about call center behavior, overleveraging, and credit cards. How is financial literacy so low that this stuff is even conflated with financial engineering? Lets talk about asset price valuations, share classes, open market operations, debt in subsidiaries...

hitekker 7y ago

For those momentarily misled by this condescending comment: > Despite its name, financial engineering does not belong to any of the fields in traditional professional engineering > It is generally (but not always) a disparaging term, implying that someone is profiting from paper games at the expense of employees and investors. >Many other authors have identified specific problems in financial engineering that caused catastrophes: Aaron Brown[23] named confusion between quants and regulators over the meaning of “capital”, Felix Salmon[24] gently pointed to the Gaussian copula, Ian Stewart[25] criticized the Black-Scholes formula, Pablo Triana[26] dislikes value at risk and Scott Patterson [27][28] accused quantitative traders and later high-frequency traders. https://en.wikipedia.org/wiki/Financial_engineering#Criticisms https://en.wikipedia.org/wiki/Financial_engineering#Criticis...

bumby 7y ago

I'm willing to guess the disagreement here is due to the definition what constitutes 'financial engineering'. I would say most laypeople would agree that using applied mathematics to hedge investments and reduce risk is okay. Most would probably also say that creating overly technical mechanism to obfuscate what is really going on would not be acceptable. I think this is why people cringe at the prospect of more and more derivative financial products being 'engineered' to create value. I personally say it gets gross from the standpoint that it is almost entirely a field of contrived rules of convenience. In other words, the 'system' is entirely human-created which comes with all the shenanigans humans bring to the table. This is in contrast to traditional engineering disciplines that are generally rooted in some sort of physics. A mechanical engineer can improve their understanding of reality, but cannot wave a magic wand and make different a different reality for their system to operate within.

StanislavPetrov 7y ago
You're right that the definition of "financial engineering" varies widely based on the interests and understanding of the parties flinging it around. One thing I'd like to point out that not all "financial engineering" involves complex mathematics. For example one of the most widespread instances of "financial engineering" across many if not most large corporations is the issuance of corporate bonds. While some corporations do this because they truly need the cash, most do so as a financial calculation based on their growth projections, the rates of returns on government bonds and other investments. The huge influx of cash raised by this sale of corporate bonds can then be used to buy back stock (inflating the stock price), paying a dividend or even taking straight cash payouts for executives. This all looks good on paper until growth projections turn out lower than expected, there is a disruption in the bond markets, currency markets or anything else that threatens to reduce the ability of the corporatation to make bond payments. This can lead to defaults, liquidation of company assets to pay bond holders or even bankruptcy. However, those executives and stock holders who made massive amounts of cash from the bond issuance, either directly or indirectly (through buybacks which artificially raised the price of the stock) walk away with all that money while the corporation itself (and the workers) are SOL.
- 7y ago