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Yes, I was sharp, good with numbers. I had marketable talents. But in the end I didn’t really do anything. I was a derivatives trader, and it occurred to me the

• philosophus 13y ago
  If it is "worthless to the society at large" then why do people pay for it? Are they insane? It's popular to beat up on the financial industry, but they do actually do something: finance loans. Without them, good luck getting a mortgage, car loan, or a loan to start a business.
  • ItendToDisagree 13y ago
    You're seriously attempting to imply that there were no loans/lending of money before 1993 (when the derivatives markets became a 'thing')? Or are you just talking about the financial sector in general (and even so there were loans long before that.) Wall St. does not exist so people can get loans to purchase houses/cars... You may be missing some points about loans vs trading here...
    • gfodor 13y ago
      You're seriously attempting to imply that there is no value provided by a highly liquid and efficient derivatives market? I'm not going to say these people are earning an amount commensurate to the value they provide to society, but pretending that they are just running a casino is equally naive.
      • ItendToDisagree 13y ago
        I would say they provide little to no value to the average person no. Please clarify what they provide to society at large (meaning most people and not just large portfolios or predatory credit companies)? Greater security and insulation against bad investments? (which to be clear the vast majority of people do not have enough money to make in the first place.) Seems a lot like playing odds at a Casino, to use your example, to me. And your edit is valid they do not provide the value (though there may be some, if little) that their millions of dollars in bonuses/salary would imply.
        • aianus 13y ago
          They make it so the interest on your mortgage is 3% instead of maybe 3.5%. That's a lot of money that you and many other normal people get to save because they do the work of connecting you to institutional investors via packaging your debt. They might take a cut and it may look big in nominal terms but barring fraud everyone is better off.
          • ItendToDisagree 13y ago
            Actually that has shown not to be true over and over throughout the history of the derivatives trading market. Nominally and in a perfect world that would be true. But as we have seen that is not the functional reality. It keeps happening that derivatives are used to hide risk rather than actually predict or insulate against it. To quote a famous politician: "There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, 'Fool me once, shame on...shame on you. Fool me — you can't get fooled again.'" And to quote a head of a self-regulatory body in charge of such things: In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans."
          • deleted 13y ago
            [deleted]
            • ItendToDisagree 13y ago
              What country? I'd like that sort of interest rate! :)
              • iaskwhy 13y ago
                Sorry, I deleted my comment. I decided to explain here why because it's sort of funny! So I have been helping a friend of mine with all the math around his new adventure, buying his first flat. Usually he just gives me the numbers directly from the bank and I work with them without questioning much because, although I have worked in finance before, I know jack about mortgages. Still, I had the bank simulation with myself so I deeply believed 0.16%, the interest the bank put on his simulation, would be around the same for everybody else. As you can guess, it's not even close. That's why I deleted my previous comment, sorry. So why did he have such a nice interest rate? Well, it seems like there's a bunch of discounts on the banking system in Europe for mortgages. For example, there's a really big discount for disabled people, they will only pay, on a variable rate, 65% of the 3m EURIBOR thus 0.16%. No spread whatsoever. Interesting, isn't it?
    • jaredsohn 13y ago
      Derivatives help determine prices, moves risk to those who want it, increase trade volume, control speculation, and create educated predictions for others to observe. http://en.wikipedia.org/wiki/Derivative_(finance)#Economic_function_of_the_derivative_market http://en.wikipedia.org/wiki/Derivative_(finance)#Economic_f...
      • ItendToDisagree 13y ago
        Exactly, they do not provide loans, or determine availability of said loans (beyond insulating risk allowing an institution to make more risky investments which as we've seen can be a catastrophic practice). I would venture that none of these things benefit the 'average' person. Not saying its a bad thing, but the great amount of money dumped into this area of the economy, does not equate to their usefulness to society. Edit: Actually the next section in the link you provided shows exactly how they can be a great detriment to economic stability including the recent AIG fiasco. the use of derivatives to conceal credit risk from third parties while protecting derivative counterparties contributed to the financial crisis of 2008 in the United States.
        • jaredsohn 13y ago
          If you're an average person who was going to lose your home, derivatives enabled the bank to give you a loan. Therefore, derivatives have provided value to average people. However, the 2008 financial crisis showed that when tested, derivatives don't provide much of the value that they were supposed to (shifting risk to those who want it and will quietly suffer the consequences of failure without having spillover effects on the rest of the economy) which essentially retcons away much of that value.
          • ItendToDisagree 13y ago
            I fully agree. With the exception that the derivatives market allowed them to make a more risky loan to you (IE one you may likely have not been able to pay off and they knew it). I would say the value to society at large is very observable as a negative. Getting a low percentage loan that is unstable or even totally illusory is not value. At least not in my opinion.
    • deleted 13y ago
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  • gjm11 13y ago
    Imagine a world where some magic firehose of money gives everyone $100k/year for free. And now suppose you have the skill of redirecting that firehose a bit, with the result that you can make one lucky person get $200k/year instead, while 11 other people get $90k/year instead of $100k/year. Then your firehose-manipulation skills are worthless to society at large -- they reduce the net influx of money by $10k/year when you practise them -- but I bet you'd have no trouble finding someone sane and willing to pay you $50k/year to point the firehose their way. (Of course in this exact scenario you would do better just to take the extra yourself; the real-world counterpart of the skill, though, produces gains roughly in proportion to the amount of money put in, and you can do better by persuading thousands of people to get you to point the firehose their way than by just working for yourself.) I make no claim that the real-world finance industry is like that. But it illustrates schematically how something can be (1) of negative value to society as a whole and (2) something sane people are willing to pay for. And it's not unreasonable to conjecture that a lot of the things investment banks and hedge funds do have something like the same structure. Oh, one other thing. Suppose that actually the firehose distributes money very unevenly. Then you might do this: manipulate the firehose to benefit one set of rich people at the expense of another, take their money, and give some of it to poor people. Doing that might be substantially net positive to society. So even taking this rather cynical view of the finance industry, some people in it might be doing a whole lot of good on balance. (It's called "earning to give" by the cool kids these days. But even if you don't explicitly give anything away, the magic of income tax -- if the government spends reasonably wisely -- may turn a slightly-negative-sum activity into something that benefits society on the whole.) [EDITED to insert an accidentally omitted word and clarify slightly. No change in substance.]
    • ItendToDisagree 13y ago
      I love your analogy! That is a pretty vivid way of illustrating it.
  • drblast 13y ago
    Joe wins the Powerball lottery. Now he's set for life, with his 250 million dollars. Joe's contribution to society was purchasing a lottery ticket. There is a high demand for lottery tickets, so Joe believes that if it weren't for people just like him, the lottery wouldn't exist and that demand would be unfilled, and everyone would be unhappy. Joe concludes, therefore, that he deserves all the money he has, because after all, the system is just what people want and it has decided that he's worth 250 million dollars. Prior to winning the lottery, Joe worked as a janitor, and provided a valuable and necessary function to society. He made $10 an hour. Now, certainly there is some qualitative difference in the reasons society valued Joe at $10 an hour before he held the winning lottery ticket and $250 million afterward. Certainly we can say that there exist a range of reasons that one might benefit from a system, and that "people will pay for it" can be used to justify just about anything. And the financial industry that people are upset about is not really the banks that provide loans (although there is some blame in the instances when people loan money to others knowing they have no hope of paying the money back). The loans existed already; without the loans there's no CDO to buy and sell. The reason the CDO's existed was that the traditional way to make a loan and get your money back over time with interest was just too damn slow, and people needed a way to pretend the risk of a group of such loans didn't really exist and that they'd make exponentially more money in perpetuity.
• anigbrowl 13y ago
  It's not worthless - derivates have an important function in reducing volatility. But the rewards for being a merely competent derivatives trader are wildly disproportionate to the rewards for being competent in some other challenging field (eg nursing, as mentioned int he article). It's a classic example of rent-seeking.
  • ItendToDisagree 13y ago
    I think history (2008 in particular) has shown many times over that they do anything BUT reduce volatility... Shielding or obfuscating possibly, but reduction in the long term, has not been their strong point.
• eshvk 13y ago
  > Hits the nail on the head for me. In the end these people make incredible amounts of money for doing what amounts to a job that is worthless to the society at large. As opposed to making incredibly amounts of money finding ways of getting Random Joe to click on ads? The only difference between him and most 20 something kids working their asses off in SV is a million dollars.
  • ItendToDisagree 13y ago
    And the ability of the industry in question to crash an economy , requiring extensive public bailout... (at least so far!) :) Edit: Also this article isn't about that sort of occupation. I was focusing on the topic at hand.
    • eshvk 13y ago
      > Edit: Also this article isn't about that sort of occupation. I was focusing on the topic at hand. That is fair, I presumed you were making a moral judgement of the way they were spending their lives, apologies if that was not the intention.