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Financial instruments are incredibly complex. It's very dangerous to engage with them unless you fully understand what you're getting yourself into. Other peopl

Financial instruments are incredibly complex. It's very dangerous to engage with them unless you fully understand what you're getting yourself into. Other people have a huge incentive to exploit any weakness in the financial asset, even in regulated industries. For instance, BlackRock bought credit default swaps in a Spanish company, and then paid that company to default on its debt, thus making a profit at the expense of the counter party. Regulation isn't going to magically make complicated financial instruments safe. People should be aware that they're dangerous and to stay away.

55555 4y ago
That is incredibly shady.
itsoktocry 4y ago
>For instance, BlackRock bought credit default swaps in a Spanish company, and then paid that company to default on its debt, thus making a profit at the expense of the counter party. Do you have a source for this? I feel like some details are lacking.
- DANK_YACHT 4y ago
  https://www.bloomberg.com/opinion/articles/2017-11-17/blackstone-may-do-its-cleverest-cds-trade-again https://www.bloomberg.com/opinion/articles/2017-11-17/blacks... The tldr is that they bought credit default swaps for debt owed by Codere SA, and then offered the company financial assistance to restructure with the requirement that they pay their existing debt late to trigger a default.
  - gvhst 4y ago
    That's BlackStone, not BlackRock. They are totally different entities.
    - fjkdlsjflkds 4y ago
      Not to be confused with BlackBoulder...
- mandevil 4y ago
  Not sure about the specific instance, but Matt Levine's invaluable Money Stuff spent a lot of time discussing so-called "Manufactured Default": https://www.bloomberg.com/opinion/articles/2018-04-10/hovnanian-s-weird-cds-trade-gets-weirder https://www.bloomberg.com/opinion/articles/2018-04-10/hovnan... is an instance of how complicated these can get. He discusses the morality of this particular issue, as part of a discussion on a proposal for the SEC to regulate it, here: https://www.bloomberg.com/opinion/articles/2021-12-16/the-sec-has-big-plans https://www.bloomberg.com/opinion/articles/2021-12-16/the-se... Basically, Levine's argument is that as a result of these sorts of shenanigans, one giant investment fund (in this case, I guess, Black Rock, though again I don't know about this specific instance) gave money to an actual company that was employing people and doing something in the real world and that was in some kind of financial trouble. And it did that because it wanted to make even more money from some hedge fund somewhere, sure, but look at who was harmed (a hedge fund that was in the business of buying and selling Credit Default Swaps) and who benefited (a real company with a whole bunch of employees who would otherwise be laid off, and another hedge fund that was in the business of buying and selling Credit Default Swaps) and I'm not sure that the whole thing is that bad?
criddell 4y ago
You’re explaining how regulations come to be. Something happens that harms some party, the event is studied and regulations are sometimes updated.
- DANK_YACHT 4y ago
  For options trading, there is always a winning and losing side. Someone is always harmed.
  - deleted 4y ago
    [deleted]
  - ksaxena 4y ago
    No. Options also provide a fundamental service - insurance. So, in the case where the option buyer is paying for insurance, sellers add value by underwriting the risk that is being insured. Hence, both the buyer and the seller win - the buyer gets insurance, the seller gets cash.
    - Jenk 4y ago
      ... and the insurance underwriters lose, upping their fees the next time around, so future insurance customers lose out, too.
  - lordnacho 4y ago
    Ex options trader here. You can sell me an option and we both make money: Let's say the option expires worthless. You make money having done nothing but collect my premium. I take the option, and because it's positive gamma, when it goes up I make money, and I flatten. When it goes down, I'm short, and I make money and buy. I keep doing this buying low and selling high until I've made more than the premium. ---EDIT My point is there can be reasons for both sides to do the trade. Nobody needs to be "harmed". The line of reasoning that says one of you must lose misses the point. If you buy insurance, either your house burns down or it doesn't. That doesn't mean either you or the insurance company was harmed.
nilsbunger 4y ago
In reality most people aren't very savvy though. Are you advocating they shouldn't invest in basic things like an S&P 500 fund or a "target date" fund or whatever? That kind of investment is almost a necessity in the US. I'd agree they shouldn't get into CDS and other esoteric instruments, and I also would put crypto investments in the 'esoteric' bucket.

55555 4y ago

That is incredibly shady.

itsoktocry 4y ago

>For instance, BlackRock bought credit default swaps in a Spanish company, and then paid that company to default on its debt, thus making a profit at the expense of the counter party. Do you have a source for this? I feel like some details are lacking.

DANK_YACHT 4y ago
https://www.bloomberg.com/opinion/articles/2017-11-17/blackstone-may-do-its-cleverest-cds-trade-again https://www.bloomberg.com/opinion/articles/2017-11-17/blacks... The tldr is that they bought credit default swaps for debt owed by Codere SA, and then offered the company financial assistance to restructure with the requirement that they pay their existing debt late to trigger a default.
- gvhst 4y ago
  That's BlackStone, not BlackRock. They are totally different entities.
  - fjkdlsjflkds 4y ago
    Not to be confused with BlackBoulder...
mandevil 4y ago
Not sure about the specific instance, but Matt Levine's invaluable Money Stuff spent a lot of time discussing so-called "Manufactured Default": https://www.bloomberg.com/opinion/articles/2018-04-10/hovnanian-s-weird-cds-trade-gets-weirder https://www.bloomberg.com/opinion/articles/2018-04-10/hovnan... is an instance of how complicated these can get. He discusses the morality of this particular issue, as part of a discussion on a proposal for the SEC to regulate it, here: https://www.bloomberg.com/opinion/articles/2021-12-16/the-sec-has-big-plans https://www.bloomberg.com/opinion/articles/2021-12-16/the-se... Basically, Levine's argument is that as a result of these sorts of shenanigans, one giant investment fund (in this case, I guess, Black Rock, though again I don't know about this specific instance) gave money to an actual company that was employing people and doing something in the real world and that was in some kind of financial trouble. And it did that because it wanted to make even more money from some hedge fund somewhere, sure, but look at who was harmed (a hedge fund that was in the business of buying and selling Credit Default Swaps) and who benefited (a real company with a whole bunch of employees who would otherwise be laid off, and another hedge fund that was in the business of buying and selling Credit Default Swaps) and I'm not sure that the whole thing is that bad?

criddell 4y ago

You’re explaining how regulations come to be. Something happens that harms some party, the event is studied and regulations are sometimes updated.

DANK_YACHT 4y ago
For options trading, there is always a winning and losing side. Someone is always harmed.
- deleted 4y ago
  [deleted]
- ksaxena 4y ago
  No. Options also provide a fundamental service - insurance. So, in the case where the option buyer is paying for insurance, sellers add value by underwriting the risk that is being insured. Hence, both the buyer and the seller win - the buyer gets insurance, the seller gets cash.
  - Jenk 4y ago
    ... and the insurance underwriters lose, upping their fees the next time around, so future insurance customers lose out, too.
- lordnacho 4y ago
  Ex options trader here. You can sell me an option and we both make money: Let's say the option expires worthless. You make money having done nothing but collect my premium. I take the option, and because it's positive gamma, when it goes up I make money, and I flatten. When it goes down, I'm short, and I make money and buy. I keep doing this buying low and selling high until I've made more than the premium. ---EDIT My point is there can be reasons for both sides to do the trade. Nobody needs to be "harmed". The line of reasoning that says one of you must lose misses the point. If you buy insurance, either your house burns down or it doesn't. That doesn't mean either you or the insurance company was harmed.

nilsbunger 4y ago

In reality most people aren't very savvy though. Are you advocating they shouldn't invest in basic things like an S&P 500 fund or a "target date" fund or whatever? That kind of investment is almost a necessity in the US. I'd agree they shouldn't get into CDS and other esoteric instruments, and I also would put crypto investments in the 'esoteric' bucket.