Posts Tagged ‘ignorance’

Longevity forever

February 23, 2010

» Long live longevity

Back in the heady days of 2006, some experts were predicting that London would become the centre of a huge new global market in trading the “longevity risk” faced by pension funds. It could eventually outstrip the huge credit derivatives market, they said.

Investment banks got very excited about it. But nothing much happened. In recent months, however, there have been a number of big longevity insurance deals that could change things.

Yesterday, BMW’s UK arm revealed it had bought insurance from Deutsche Bank’s Abbey Life that will protect it against the risk that the 60,000 members of its pension scheme live longer than expected.

Hmmmmm, I foresee a financial product called a longevity swap.

This is how financial engineering starts: a specific requirement which gets resold and resold and resold. What is more depressing is that most people will think of these securities as “complex financial engineering”, an almost wilful misunderstanding of them. Yet just today I was watching a very nice advertisement hosted by that very nice Michael Parkinson about some very nice life assurance product (I was ill, if anyone was wondering what I was doing) where people paid a very nice regular amount per month and, after two years of paying, were assured a very nice life assurance payment on their death.

Insurance is all about risk, and so are the financial markets – measuring it, controlling it, charging for it. And generally, for a purpose (admittedly a purpose which can later by absorbed by the larger world of speculation). Financial products such as derivatives and swaps did not come into life for no apparent reason. It’s a point I always feel is underplayed: these fancy financial products are useful to someone.

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Hector Sants to step down from top FSA post

February 9, 2010

» Hector Sants to step down from top FSA post

The FSA faced criticism that it failed to prevent the credit crisis by not restricting risk-taking at banks such as Northern Rock, which built up huge liabilities.

Mr Sants led the fightback and oversaw an overhaul of banking regulation, saying banks “should be very frightened” of the regulator.

I think it is only regulators who think that the regulated do not fear them. On the other hand, I fear a toddler wandering around with a automatic machine gun for a teddy bear, it doesn’t mean I am in awe of their judgement.

Regulators are basically a bunch of people trying to control a system they have never experienced and do not understand. Occasionally bankers all get together and complain about:

  1. The regulator never actually doing anything, seriously, if you follow regulation very carefully and studiously (and spend a lot of money on it) then you get really tetchy when other people don’t and seem to get away with it scot-free;
  2. Them never understanding anything;
  3. How much worse than the FSA all the European regulators are;
  4. The lack of firm decisions;
  5. How much data we submit which is blatantly ignored.

Except we don’t like to say anything because you never quite know how the regulator is going to respond. And, really, we’re very British in that we don’t like to say anything (but, tsk, do you see what they’re wearing). Besides, that teddy bear might go off.

Goldman says reports of CEO testimony improper

January 17, 2010

» Goldman says reports of CEO testimony improper

There are two ways to interpret Goldman Sachs’ activity here:

  • They ruthlessly and unpleasantly sold products they knew were going south
  • They hedged their position

Personally, I believe the latter. Mostly because, as a broker, Goldman’s main job is to help its clients buy or sell the assets the client wishes to buy and sell. Deciding an investment strategy is the client’s job (or their adviser, or asset manager, or whatever). Judging the quality of the assets is the job of a credit ratings agency. Obtaining the assets is Goldman’s job.

If you go to a fishmonger and want to buy salmon – and the fishmonger tells you he thinks salmon is disgusting and you’d be better off going for cod – then you may be wondering when you invited the fishmonger to lunch or asked him for advice on your menu (you may do many other things, from follow his advice or, if you are a serial killer, batter him to death [batter – food pun, ha ha] with a lump of fish, but you get my point). You want salmon, he sells you salmon. He then buys more salmon from his supplier to restock – and his activities of buying and then selling at the same time are unlikely to lead to him being denounced by, well, everybody.

The fact is, investment banking is not a commune. Some hedge fund wants to go long CDOs or the latest cool stocks? Let them. Just don’t expect the broker to do the same thing. We don’t expect our doctors to get our illness, lawyers to become a party to our contracts, estate agents to move in with us. Brokers are risk averse. They’re not going to pin their entire profits on their clients’ investment strategies or even ask them what they are. Many businesses are the same – they are there to help you buy and sell, they are not there to share your tastes. It is when those riskless businesses screw-up, like Lehman, that things get very fishy indeed.