Wednesday, March 28, 2012

Equity derivative structurer: 'you have to read the fine print ... otherwise there is information asymmetry'

The Guardian ran an interview with a former equity derivatives structurer.  His comments highlight the critical role that having ultra transparency into a financial product plays and why Joseph Stiglitz highlighted information asymmetry as a major contributor to the credit crisis.

"I have read Greg Smith's resignation letter from the equity derivatives desk at Goldman Sachs. For me, it goes back to the values in an organisation. If you could sell your product for double the price, would you do it? I would say, in business, that's legitimate, provided your clients have adequate information. 
"This is an important rule with structured derivatives that clients ignore at their peril. You have got to read the small print. You need to bring in a lawyer who explains it to you before you buy these things – otherwise there is information asymmetry. 
Information asymmetry is not restricted to the small print.
"There is a lot of mis-selling, and not just in derivatives. The mortgage brokers in the US who sold low-income people those sub-prime mortgages. Low-income people didn't understand finance, didn't comprehend that interest rates would jump after a short discount period. That's mis-selling. 
"If a financial tool is abused and mis-sold, this does not disqualify the tool.
Information asymmetry also exists when complex products are sold to buyers who are unable to understand what they are buying.  This information asymmetry can reflect a lack of knowledge of finance on the part of the buyer or it can reflect the design of the financial product.

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