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Well said. I'm an ex-quant, and one thing that is supremely irritating about discussions of Abacus is the inability of people to distinguish between acting as

Well said. I'm an ex-quant, and one thing that is supremely irritating about discussions of Abacus is the inability of people to distinguish between acting as a fiduciary and acting as a market maker. When a counterparty calls GS up for a quote on the JPY/USD cross, they don't care one iota what GS's internal positioning is, or where GS thinks the JPY/USD will be in 3mths time, or any other number of things. These are sophisticated counterparties (as you pointed out) who 1) know that GS doesn't owe them a fiduciary duty, and 2) don't expect it to. It seems like theres a whole population of people out there who think that GS is playing some sort of trusted financial advisor role in OTC derivative trades, when in fact it's in a bidding war between 4 other banks to get you the lowest rate. That's the case in Abacus as well, AFAICT. If you don't want to trade thinly traded opaque credit derivatives, don't trade them. No-one is forcing you to. But if you don't understand your risks, you trade, and your position moves against you, don't blame your counterparty. Blame yourself.

intended 14y ago
The OP did point out that even the "qualified investors" had no clue what they were doing. Just to make sure we both read it the same way. Also, and correct me If I am wrong - you've moved to discussing a quote from GS for a product (JPY/USD cross to be specific), and not CDOs in particular. This is in order to point out that: GS has no fiduciary duties to the buyer This point is reiterated in your last line as well - no one is to blame if you made a bad trade, other than yourself. So in essence, you are arguing caveat emptor - correct?
- ajtulloch 14y ago
  I'm agreeing with svdad, who emphasized the role of caveat emptor in OTC derivative transactions. There's no significant distinction (IMO) between a trade on a 3m butterfly on the JPY/USD vs. a the 3%-7% tranche of Abacus - both are derivative transactions with well-defined risk/rewards, and you do your own research and come to your own conclusions on the value of the product. Sure, one is more liquid, more transparent, etc. but that's a factor to be taken into account when buying, not a reason for complaining when MTM moves against you.
  - intended 14y ago
    Well the similarities between the two are sufficient for a caveat emptor argument. But the distinctions are also important. With a CDO, you have the ability to stuff it with bad debt, which is what banks did. When bankers are intentionally creating debt instruments which are going to explode, then it's different from just calling a bank to get their quote. And at that juncture we can also ask, if a situation where mortgage payout =x, but banks are aiming for 30x by betting that the owner defaults - aren't the incentives off? Also, when the bank is shorting the instrument and doesn't disclose it... Well generally that at the very least sounds like something most people here would want to disrupt, because it's well, not what regular people consider to be fair business. The standard cabeat emptor defense also stands because we believe in the qualified investor aspect of the equation. And right now, not most investors are qualified for it. As svdad said - most investors aren't doing their diligence, and couldn't do it even if they tried. So perhaps that needs to be fixed, or we need a stronger regulator to gate entry. (And reaching a situation where our regulators are not powered enough to grok the derivative, is just something we want the system to move away from over time.) Edit: above is opinion, I'm open to listening, I do have a pretty firm idea, but work actively to dislodge it. Standard boiler plate. As I said before, I'm not the most eloquent.

intended 14y ago

The OP did point out that even the "qualified investors" had no clue what they were doing. Just to make sure we both read it the same way. Also, and correct me If I am wrong - you've moved to discussing a quote from GS for a product (JPY/USD cross to be specific), and not CDOs in particular. This is in order to point out that: GS has no fiduciary duties to the buyer This point is reiterated in your last line as well - no one is to blame if you made a bad trade, other than yourself. So in essence, you are arguing caveat emptor - correct?

ajtulloch 14y ago
I'm agreeing with svdad, who emphasized the role of caveat emptor in OTC derivative transactions. There's no significant distinction (IMO) between a trade on a 3m butterfly on the JPY/USD vs. a the 3%-7% tranche of Abacus - both are derivative transactions with well-defined risk/rewards, and you do your own research and come to your own conclusions on the value of the product. Sure, one is more liquid, more transparent, etc. but that's a factor to be taken into account when buying, not a reason for complaining when MTM moves against you.
- intended 14y ago
  Well the similarities between the two are sufficient for a caveat emptor argument. But the distinctions are also important. With a CDO, you have the ability to stuff it with bad debt, which is what banks did. When bankers are intentionally creating debt instruments which are going to explode, then it's different from just calling a bank to get their quote. And at that juncture we can also ask, if a situation where mortgage payout =x, but banks are aiming for 30x by betting that the owner defaults - aren't the incentives off? Also, when the bank is shorting the instrument and doesn't disclose it... Well generally that at the very least sounds like something most people here would want to disrupt, because it's well, not what regular people consider to be fair business. The standard cabeat emptor defense also stands because we believe in the qualified investor aspect of the equation. And right now, not most investors are qualified for it. As svdad said - most investors aren't doing their diligence, and couldn't do it even if they tried. So perhaps that needs to be fixed, or we need a stronger regulator to gate entry. (And reaching a situation where our regulators are not powered enough to grok the derivative, is just something we want the system to move away from over time.) Edit: above is opinion, I'm open to listening, I do have a pretty firm idea, but work actively to dislodge it. Standard boiler plate. As I said before, I'm not the most eloquent.