Wednesday, February 17, 2010

Wall Street's Euro Scams - Newsweek.com

Little-publicized deals like these help to explain the mystifying profit levels of Wall Street, even after the crisis. For two decades, Wall Street's biggest money machine has been driven by a formula: create very complex deals with high profit margins and leverage up to do the deals in volume. The complexity is made possible by the freedom that Washington regulators have given the banks to structure little-understood derivatives off public exchanges, or "over the counter." These hard-to-understand deals—labyrinthine structures that combine swaps in different currencies, for example—permit the banks to charge huge "spreads" to customers like the Greek government because the deals are "customized" or one-time-only affairs not subject to public scrutiny or competitive pricing. And it's not over for Athens or other weaker sisters such as Spain and Portugal. The OTC swaps market "is currently pushing Greece to the edge," says Hardouvelis. "Hedge funds and banks can bet on the cost of Greek government debt by taking positions in the CDS [credit default swaps] market without owning Greek debt. In a thinly traded underlying bond market, the derivative CDS market can cause damage and is prone to manipulation by insiders."
Wall Street's Euro Scams - Newsweek.com
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