The Triple Lizard Is a Love Story and a Cautionary Tale
The exotic-derivatives business is simple and easy until the bank realizes its large profits were actually large losses.
The magic is in the math.
Photographer: Ian Waldie/Getty Images AsiaPacThis post originally appeared in Money Stuff.
A lot of banking businesses are mysterious, but the exotic-derivatives business is actually very straightforward and normal. It is a sort of manufacturing business. You think about a product that customers might want, a need that they have that can be filled by a product you can build. Once you have an idea for a product, you design it and figure out how to manufacture it efficiently. You figure out a price: You add up the costs of the raw materials and labor that you use in the manufacturing, add a markup for profit, and check to be sure that the price you get is something that customers might pay. You give it appealing packaging and a cute name, and create a marketing strategy. You go out and market it to customers, telling them a compelling story about how it will meet their needs and also make them stronger and more attractive and get them invited to all the cool parties. Then, when you get orders, you manufacture the product and deliver it to the clients. They get a product that they like and that serves their needs; you get your markup. It is like building an iPhone or whatever, except that instead of glass and silicon the raw ingredients are stocks and debt instruments.