Black People : Main st. it's 3 card Monte, but on Wall st. it's called Derivitives

Discussion in 'Black People Open Forum' started by Ankhur, Dec 27, 2009.

  1. Ankhur

    Ankhur Well-Known Member MEMBER

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    Experts: Derivatives inherently vulnerable to fraud

    Washington’s Blog

    December 25, 2009


    As I have previously noted, credit default swaps are destabilizing for the economy. See this. And the models used to evaluate financial instruments – such as the Gaussian copula formula for CDOs – are inherently flawed.

    Now, Princeton University economists and computer scientists have demonstrated that financial derivatives are also inherently vulnerable to fraudulent pricing.


    PhysOrg summarizes Princeton’s findings:

    In a result that may have implications for financial regulation, researchers from computer science and economics have revealed potentially impenetrable problems with the pricing of financial derivatives. They show that sellers of these investments could purposefully include pieces of bad risk that no buyer could detect even with the most powerful computers.

    The research focused on collateralized debt obligations, or CDOs, an investment tool that combines many mortgages with the promise of spreading out and lowering the risk of default. The team examined what would happen if a seller knew that some mortgages were “lemons” and structured a package of CDOs to benefit himself. They found that the manipulation may be impossible for buyers to detect either at time of sale or later when the derivative loses money.

    The team consists of Sanjeev Arora, director of Princeton’s Center for Computational Intractability, his colleague Boaz Barak, economics professor Markus Brunnermeier, and computer science graduate student Rong Ge.

    It is now standard wisdom that a major culprit in the 2008 financial meltdown was use of simplistic mathematical models of risk at financial firms. This paper, released as a working draft Oct. 15, suggests that the problems may go deeper.

    “We are cautioning that even if you have the right model it’s not easy to price derivatives,” Arora said. “Making the models more complicated will not make these effects go away, even for computationally sophisticated.”

    Arora noted that the problem arises from asymmetric information between buyers and sellers, and goes against conventional wisdom in economic theory, which holds that derivatives reduce the negative effects of such unequal information.

    “Standard economics emphasizes that securitization can mitigate the cost of asymmetric information,” Brunnermeier said. “We stress that certain derivative securities introduce additional complexity and thus a new layer of asymmetric information that can be so severe it overturns the initial advantage.”

    Brunnermeier noted that the finding came from combining computer science and finance, which has not been done before but has the potential for further insights. “I anticipate that both fields can enrich each other,” he said.
     
  2. truetothecause

    truetothecause Well-Known Member MEMBER

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    Sounds interesting. Can you break it down using street lingo or analogy?

    I'm picking up something like....If I were to buy a house, the seller could include somewhere in the price these "derivatives" or money that MUST be paid in order for the sell of the home to go through. Its something that is included in the price. These "derivatives" prices go to another entity other than the seller of the home. The person handling the sell could in fact be one of the benefactors of the derivatives.....

    or something to that nature. How close or far am I and can you fill in the gaps or provide a different example/analogy to further explain what is going down

    M.E.
    :hearts2:
     
  3. Ankhur

    Ankhur Well-Known Member MEMBER

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    not really, the con is we nver see it or feel it until we have to bail it out or the economy goe down the sewer.

    Derivitives are bad loans that have been bundled with thousands of other bad loans and then "stamped" by the Grand Poobahs of inance as AAA good.

    that's the flip card that the Monte artist wants you to bet on, but when you do it's not there, in other words the other financial agencies play this BS bundle as proper chedda so much that they make a pyramid scheme out of it, and that is

    unfortunatly legal.
     
  4. Ankhur

    Ankhur Well-Known Member MEMBER

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    not really, the con is we nver see it or feel it until we have to bail it out or the economy goe down the sewer.

    Derivitives are bad loans that have been bundled with thousands of other bad loans and then "stamped" by the Grand Poobahs of inance as AAA good.

    that's the flip card that the Monte artist wants you to bet on, but when you do it's not there, in other words the other financial agencies play this BS bundle as proper chedda so much that they make a pyramid scheme out of it, and that is

    unfortunatly legal.
     
  5. truetothecause

    truetothecause Well-Known Member MEMBER

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    Soooooo.....the financial institutions end up buying a bundle of bad loans that were brought and stamped as good and they get the smelly end of the stick IF they end up purchasing what they thought were good loans only to find out they are bad.

    WE end up paying the price cause now we bail them out of their folly and foolishness having gotten got by the dealer:?:

    Is that what's happened:? and this is all LEGAL dealings for financial institutions to play this shell game with money, loans, debt and the misery/loss incurred by millions who were unable to pay off some debts

    M.E.
    :hearts2:
     
  6. Ankhur

    Ankhur Well-Known Member MEMBER

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    As in the Middle Passage, Concern for human life

    is of no concern, when compared to "the bottom line and profit margin"

    Please listen to these archive on
    http://takingaimradio.com/shows/audio.html

    090728 The Finance Plutocracy and the 24 Trillion Dollar Heist
    090901 The Chimera of Capitalist Recovery, part 1: Toxic Banks

    090908 The Chimera of Capitalist Recovery, part 2: The Global Dimension
    090922 The Chimera of Capitalist Recovery, part 3: The War on Working People

    also check out "Capitalism, a Love Story", by Michael Moore
     
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