futures? options? are they considered financial engineering? someone? well can't deny that their good, but they are simple , (compared to other hugely complicated instruments) and their almost a basic trade instrument. now, look at the one that caused the crisis, the one that bet on ever increasing porperty prices, ive look at it, and the only i can understand is the increasin prices part, so does many other smarter people. financial instruments are becoming increasing uncessarily complicated. why the complexity? im aware that i may overlook and misunderstand having not gone through the training, but it seems that it's going way way overbored.
Didn't Volcker recently say that recent financial innovation was a load of bullshit (not in those words, exactly) and that the only real beneficial innovation recently was the ATM?
Financial engineering seems to be all about hiding your cut and the underlying risk of the instrument you are selling to a counterparty.
I don't think the scandal comes from the modeling and creation of new products. There was an article that tried to tie everything back to some financial engineering formula - yeah, some formula took down the economy. The implication is that these rocket scientist types are just too brainy for their own good, incapable of seeing the forest for the trees, out of touch nerds. No. I think smart people are generally smart. For every quant there is likely a greedy cowboy overlord trying to bend things to make a deal work. The availability of new products does make sense and makes the market more efficient - in theory. Don't forget the role of "liar loans" etc in the crisis. There was no incentive for companies writing up the mortgages to make things truthful. Making sure that interests are aligned through the whole mortgage supply chain works out that problem. Anyone who studies modeling knows that "model risk" is very real.
When the industry itself uses a term like "liar's loans", it's pretty obvious that there is fraud going on.
While I'd agree, in general, I don't think that MBS are a particularly heinous example of financial engineering. I actually think it's a pretty good idea and the Danes, who have the oldest and, arguably, best-functioning mtge system in the world, have done wonders with MBS. CDOs and the other such crapola, I agree, is an excuse to take money from end-users. As to David X Li and his Gaussian copula formula, the article in Wired was plain rubbish. Generally, blaming the quants for the current issues is plain silly.
Buyer Beware Buyer Beware Buyer Beware. That's it. We were in a super-bullish environment in 2005-2007 and people had no concept of the risk they were taking. Also, people who act as fiduciaries, and make decisions based on massive amounts of other people's money, should have been extra careful- which they simply were not. There's nothing wrong with a derivative contract, but there's something terribly wrong with taking gobs of other people's money and tying it to an investment you don't understand.