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When Can Bond Traders Lie to Their Customers – Bloomberg View

PinocchioThe first argument — that information about what a dealer paid for bonds is not relevant to a reasonable investor who has done his own homework on value — is sort of appealing, but probably not right. FULL ARTICLE 
Comments
  • Zob
    ZobDecember 11, 2015"Mortgage Bonds. Thrifts. 80s... Ha ha! how the world has changed... and for the better BUT at the same time is this about changing human nature or just applying the old Pinocchio saying of 'don't lie or at least don't get caught lying'.…"
  • Merlin
    MerlinDecember 11, 2015"Wet towels are ok. If a house last sold for $1.5mm and is now listed at $1.2mm, is that an opportunity to purchase from a motivated seller or have equivlent houses been selling for $1mm still overstating the value of this house. It is not what this house last traded at but what alternative options are available and whether this house appears to be good value or not. Same for bonds. And your statement that there is no fundamental reason a simple 4-bedroom house in the…"
  • Chipper
    ChipperDecember 11, 2015"Sorry to be the wet blanket, but I think the used car analogy doesn't fit well here. But to stick with it, what if the car was being financed by the dealer, and they sold it to you at $20,000 but then valued it at $17,000 for financing purposes because that is the true value in their mind? Maybe residential real estate is more applicable...if you buy a house in CT you absolutely want to know the last price paid for it, the improvements since, the comparables, etc. If…"
  • Merlin
    MerlinDecember 10, 2015"First is reaction is they are kidding. Traders constantly mis-represent the level they bought or can buy bonds (at least pre-TRACE or those not reported on TRACE) as they use any/all tools/methods to extract the maximum amount of profit without risking the client finding out. And as has been discussed, does it matter? Prices move for all kinds of reasons that are security specific, issuer specific, industry specific or just with the market. What does one think the bon…"

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8 Comments on "When Can Bond Traders Lie to Their Customers – Bloomberg View"

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Jester
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In my experience as a bond trader I worked under the knowledge that bond brokers lied for a living, so their input was always discounted. As a salesman I believed you had some a fiduciary duty to the customer and were always at risk to lose the customer if you compromised your integrity.. The greatest conflict was standing between the trader that wanted to sell it higher and the customer thar wanted to buy it lower.often both sides gave you or implied some discretion or movement and you picked one to win based upon future expectations. In math intensive products… Read more »
Wolfman
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This can be one of the most hotly debated focus articles to date. Here’s one way to look at it, and I’ll use the used car dealer reference in the article to make my point. Here goes. Car dealers make more on used cars than new cars. Do you know why? The new car market is the primary market, the issuance if you will, of the bond market. All dealers pay the same price to the manufacturer and may benefit from volume discounts, private financing, location preferences that the manufacturers might offer to grow market share, etc. Used cars, on… Read more »
Rob Hedges
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Wolfman took the words out of my mouth. The article screams second hand car salesman. It would be nice to think that the financial industry operates to a higher standard but so often this is not the case. Salesman appeal to the fear and greed instincts in the consumer and one way to get people to buy is to tell them they are getting a ‘great deal’. Everybody loves to think they got something cheaply, as Wolfman points out the smart people work out if this really is the case and others are possibly just too lazy to do so… Read more »
Goose
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If I recall correctly some of the trades in question were non-agency RMBS, and Commercial MBS. This is the kind of stuff that has a fair amount f optionality in it around presumptions on prepayment speeds, loan quality, deal structure etc. Each tranche is also pretty unique in loan makeup, so comparison to other’s with similar characteristics could generate a ballpark idea…. or there may be nothing to compare it to at all. If this is the case, models used and opinions on value can be..quite divergent. Cue Wolfman. “If, on the other hand, you are looking for that special… Read more »
Merlin
Guest
First is reaction is they are kidding. Traders constantly mis-represent the level they bought or can buy bonds (at least pre-TRACE or those not reported on TRACE) as they use any/all tools/methods to extract the maximum amount of profit without risking the client finding out. And as has been discussed, does it matter? Prices move for all kinds of reasons that are security specific, issuer specific, industry specific or just with the market. What does one think the bond is worth now? If the trader ended up taking a loss, would anyone feel sorry that what they thought they could… Read more »
Stinger
Guest
Sorry to be the wet blanket, but I think the used car analogy doesn’t fit well here. But to stick with it, what if the car was being financed by the dealer, and they sold it to you at $20,000 but then valued it at $17,000 for financing purposes because that is the true value in their mind? Maybe residential real estate is more applicable…if you buy a house in CT you absolutely want to know the last price paid for it, the improvements since, the comparables, etc. If the broker misrepresents those factors it is absolutely fraud in the… Read more »
Merlin
Guest
Wet towels are ok. If a house last sold for $1.5mm and is now listed at $1.2mm, is that an opportunity to purchase from a motivated seller or have equivlent houses been selling for $1mm still overstating the value of this house. It is not what this house last traded at but what alternative options are available and whether this house appears to be good value or not. Same for bonds. And your statement that there is no fundamental reason a simple 4-bedroom house in the NY area should cost $1.5mm seems flawed. There are plenty of places where you… Read more »
Voodoo3
Guest

Mortgage Bonds. Thrifts. 80s… Ha ha! how the world has changed… and for the better BUT at the same time is this about changing human nature or just applying the old Pinocchio saying of ‘don’t lie or at least don’t get caught lying’.

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