4 ms·

Can anyone see what the value these traders add to the market? It seems so perverse that they can earn so much money while creating so little value. And the fi

by codexon 17y ago

Can anyone see what the value these traders add to the market? It seems so perverse that they can earn so much money while creating so little value. And the financial industry is essentially allowed to bet on funds that don't exist (unbacked insurance), safely knowing that the government will print cash to help pay these imaginary sums should disaster happen.

jakarta 17y ago
of course there is value. Do you know anyone who benefits from a pension fund or endowment? Well-- those guys benefit from someone like Paulson who can profit when the market tanks. But let's go broader. You are looking at capital incorrectly. Let's say you are given money from investors for your start up. Eventually though, your start up begins to tank. Competitors are coming in, you are just not good enough, and any incremental reinvestment in the start up will likely yield negative returns. Is it really wise of you to squander your investor's money like that? No. You would be better off parking that capital where it will generate returns (i.e.: a financial investment) or giving it back. Warren Buffett was confronted with this prospect when he took over Berkshire Hathaway, a failing textile mill. Textiles were rapidly going overseas and Buffett had a choice to make. He could take the business' cash flow and buy new equipment, to try to compete. Or he could invest it elsewhere. He chose to invest it elsewhere and look where Berkshire is today: $10K invested back then would be $50M today. Sometimes investing in the business is the wrong choice, especially when you have a responsibility to your investors.
- codexon 17y ago
  Investing in derivatives like CDOs is completely different from investment in equities. Its like if I sold you insurance for $999 trillion that there wouldn't be an earthquake in California tomorrow. I obviously don't have that much money, just like those banks didn't have the money that they are now paying Goldman Sachs and the guy in this article with taxpayer money. Ironically you cite Warren Buffet when he himself was quoted as saying "I view derivatives as time bombs". http://news.bbc.co.uk/2/hi/business/2817995.stm http://news.bbc.co.uk/2/hi/business/2817995.stm
  - jakarta 17y ago
    Warren Buffett also invests in mispriced derivatives. You should take some time to read the following: http://www.berkshirehathaway.com/news/may0208.pdf http://www.berkshirehathaway.com/news/may0208.pdf Also, note that during the 2008 AGM Warren Buffett remarked that a small canadian insurance company had profited from credit default swaps, and mentioned that they aren't all that bad. He was referring to Fairfax Financial, a company I myself invested in over 2 years ago with the intention of hedging against sub-prime: http://en.wikipedia.org/wiki/Fairfax_Financial#Subprime_mortgage_bubble http://en.wikipedia.org/wiki/Fairfax_Financial#Subprime_mort... Fairfax was likely the ONLY insurance company to protect its shareholders from the financial crisis and profited immensely. They were able to use the CDS investments to profit and then sold and reinvested in equities. Next time try arguing with better facts than an arbitrary quote.
    - codexon 17y ago
      Well if he can't beat them, he joins them. It doesn't look like he's doing all that well following the latest fad though. http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX1k9rMDnQ http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX...
      - jakarta 17y ago
        oh boy, you're on a losing streak here. Look at the date of that article, it is from April. Go see what the S&P 500 has done since then (Hint: it is up 22%). Meaning, the mark to market loss that those derivatives at will have already narrowed quite a bit. He still has a ways to go, but so far things appear to be in his favor. Also, remember that it is a paper loss, he still has not paid anything out. So he still gets to put those premiums to work in the market, given his recent performance on his warrants w/ GS and others, he is doing quite well.
        codexon 17y ago
        I don't know why you keep wanting to "win" and talking condescendingly to me as though you have some personal stake in this argument when its readily apparent that you are not correct. Can you go see what the S&P has done since that press release you cited? (Hint: its down 27%). Now I'm not saying that you can't make a bunch of money on derivatives. Let's stop arguing about this. The fact is that derivatives is about as moral as gambling except that you can gamble imaginary sums and the government will step in to pay with tax payer money because Goldman Sachs owns the Fed and the banks are "too big to fail". Even Warren Buffet has admitted that they are bad, and its not just one random quote. Just because he is joining the club doesn't mean that derivatives have stopped being bad, it only means that he can't fall behind the other investment vehicles.
MikeCapone 17y ago
If he's selling, someone is buying, and vice-versa.
flipbrad 17y ago
Is this about whether they add value, or destroy it? In this case: "Some investors later would argue that Mr. Paulson's actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices."

by codexon 17y ago

jakarta 17y ago

of course there is value. Do you know anyone who benefits from a pension fund or endowment? Well-- those guys benefit from someone like Paulson who can profit when the market tanks. But let's go broader. You are looking at capital incorrectly. Let's say you are given money from investors for your start up. Eventually though, your start up begins to tank. Competitors are coming in, you are just not good enough, and any incremental reinvestment in the start up will likely yield negative returns. Is it really wise of you to squander your investor's money like that? No. You would be better off parking that capital where it will generate returns (i.e.: a financial investment) or giving it back. Warren Buffett was confronted with this prospect when he took over Berkshire Hathaway, a failing textile mill. Textiles were rapidly going overseas and Buffett had a choice to make. He could take the business' cash flow and buy new equipment, to try to compete. Or he could invest it elsewhere. He chose to invest it elsewhere and look where Berkshire is today: $10K invested back then would be $50M today. Sometimes investing in the business is the wrong choice, especially when you have a responsibility to your investors.

codexon 17y ago
Investing in derivatives like CDOs is completely different from investment in equities. Its like if I sold you insurance for $999 trillion that there wouldn't be an earthquake in California tomorrow. I obviously don't have that much money, just like those banks didn't have the money that they are now paying Goldman Sachs and the guy in this article with taxpayer money. Ironically you cite Warren Buffet when he himself was quoted as saying "I view derivatives as time bombs". http://news.bbc.co.uk/2/hi/business/2817995.stm http://news.bbc.co.uk/2/hi/business/2817995.stm
- jakarta 17y ago
  Warren Buffett also invests in mispriced derivatives. You should take some time to read the following: http://www.berkshirehathaway.com/news/may0208.pdf http://www.berkshirehathaway.com/news/may0208.pdf Also, note that during the 2008 AGM Warren Buffett remarked that a small canadian insurance company had profited from credit default swaps, and mentioned that they aren't all that bad. He was referring to Fairfax Financial, a company I myself invested in over 2 years ago with the intention of hedging against sub-prime: http://en.wikipedia.org/wiki/Fairfax_Financial#Subprime_mortgage_bubble http://en.wikipedia.org/wiki/Fairfax_Financial#Subprime_mort... Fairfax was likely the ONLY insurance company to protect its shareholders from the financial crisis and profited immensely. They were able to use the CDS investments to profit and then sold and reinvested in equities. Next time try arguing with better facts than an arbitrary quote.
  - codexon 17y ago
    Well if he can't beat them, he joins them. It doesn't look like he's doing all that well following the latest fad though. http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX1k9rMDnQ http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX...
    - jakarta 17y ago
      oh boy, you're on a losing streak here. Look at the date of that article, it is from April. Go see what the S&P 500 has done since then (Hint: it is up 22%). Meaning, the mark to market loss that those derivatives at will have already narrowed quite a bit. He still has a ways to go, but so far things appear to be in his favor. Also, remember that it is a paper loss, he still has not paid anything out. So he still gets to put those premiums to work in the market, given his recent performance on his warrants w/ GS and others, he is doing quite well.
      - codexon 17y ago
        I don't know why you keep wanting to "win" and talking condescendingly to me as though you have some personal stake in this argument when its readily apparent that you are not correct. Can you go see what the S&P has done since that press release you cited? (Hint: its down 27%). Now I'm not saying that you can't make a bunch of money on derivatives. Let's stop arguing about this. The fact is that derivatives is about as moral as gambling except that you can gamble imaginary sums and the government will step in to pay with tax payer money because Goldman Sachs owns the Fed and the banks are "too big to fail". Even Warren Buffet has admitted that they are bad, and its not just one random quote. Just because he is joining the club doesn't mean that derivatives have stopped being bad, it only means that he can't fall behind the other investment vehicles.

MikeCapone 17y ago

If he's selling, someone is buying, and vice-versa.

flipbrad 17y ago

Is this about whether they add value, or destroy it? In this case: "Some investors later would argue that Mr. Paulson's actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices."