Does that cartoon look complex to you? There are a couple of reasons for this:
- The bankers, lawyers, and other advisers are picking your pocket.
- In a perverse way, needless complexity is good for business, because it makes people feel like they are paying for meaningful services.
- It justifies the enormous fees collected by Wall Street, not just for brokerages, but also for the now discredited ratings agencies..
The net result is financial firms' books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.(emphasis mine)
So, you have the same amount of risk, but by slicing and dicing securities into new "pools" (a year ago the word was "tranches", but well, we know how that went.
This is not about managing risk, or understanding risk. This is about concealing risk from the unsophisticated investor and unsophisticated regulators.
This is a perfect example of why investments should be treated like drugs: Forbidden until proven safe and effective.
Financial innovation, my ass.
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