Satyajit Das: “Derivatives and Debt Are the Needles of Finance”

I have repeatedly argued that:

  • Most economists have acted like team doctors for the financial giants, pushing increased levels of leverage (i.e. debt – to the extent that increased leverage means borrowing more) like sports docs push injured athletes to get a shot of steroids and get back on the field

Derivatives expert Satyajit Das confirms all of these points (and provides some memorable quotes in the process):

The industry and its key lobby group (ISDA – International Swaps & Derivatives Association) are well practiced in the art of regulatory skullduggery.

Derivatives, it will be argued, are soooo complicated that only derivative traders themselves can properly “regulate” them. If this fails then there will be more subtle rhetorical thrusts.

The new CCP [new centralised counterparty] is only for “standardised” derivatives. Already, there are impassioned semantic debates about what is meant by “standard derivatives” and whether they can actually be cleared through the CCP…

The complexity of modern derivatives has little to do with risk transfer and everything to do with profits. As new products are immediately copied by competitors, traders must “innovate” to maintain revenue by increasing volumes or creating new structures. Complexity delays competition, prevents clients from unbundling products and generally reduces transparency. Frequently, the models used to price, hedge and determine the profitability also manage to confuse managers and controllers within banks themselves allowing traders to book large fictitious “profits” that their bonuses are based on…

Warren Buffet once described bankers in the following terms: “Wall Street never voluntarily abandons a highly profitable field. Years ago… a fellow down on Wall Street…was talking about the evils of drugs…he ranted on for 15 or 20 minutes to a small crowd…then…he said: “Do you have any questions?” One bright investment banking type said to him: “yeah, who makes the needles?

Derivatives and debt are the needles of finance and bankers will continue to supply them … for the foreseeable future as long as there is money to be made in the trade.


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