When people ask me why the financial system is so complicated, I always say the same thing: because it benefits the insiders of the financial system to make it that way. The more complicated and opaque something is, the more opportunities to extract fees and withhold information. Or rather, to withhold information in order to extract fees.
In some sense you can think of the financial system as a huge “information loss” system, where people get paid based on how much more information they know than you do. Incidentally, this theory flies in the face of most economic assumptions of transparency, and explains the origin of the phrase “dumb money.” And it’s not my idea, it’s kind of an elemental fact for insiders; I’m bringing it up because I want to make sure people are aware of it.
As an analogy, think of the situation when you buy a used car from someone. They tell you some things, like its make and model, and they may let you test drive it, but you end up not knowing how many accidents it’s been in, and stuff like that. Your partial information in general lets them make money.
It’s kind of understandable why there’s so much insider trading going on. Insider trading is the ultimate and most efficient way to profit from information.
Another good example of information loss is with mortgages, and mortgage-backed securities. The original idea behind securitizing mortgages was that investors get to buy pieces of pools of mortgages, which “behave better” than individual mortgages: whereas an individual can refinance (and often does, when interest rates go down) or default, it’s less likely that a majority of the people in a pool refinance or default.
[Let’s ignore for now the issue that the banks got so high on the profits of securitization that the assumption of better behavior of pools got thrown out the window as the underlying mortgages became worse and worse – a gleaming example of information loss.]
In selling these pools, the banks were charging fees so that you, the investor, wouldn’t have to “deal with the details” of all of the individual mortgages in the pool. This is one way that people withhold information and charge a fee for it, by calling it a chore.
And it is a chore, if you actually do it. However, in the case of mortgages, lots of banks charged that fee for that chore and then never actually did the chore- they kept terrible accounts of the mortgages, and when they started to default in large numbers, started illegally pretending their papers were in order, through “robo-signing,” in order to foreclose quickly.
Here’s something you can do if you have a mortgage. Demand to see your mortgage note. It turns out there’s a legal way for you to ask your bank to trace the ownership of your mortgage through the securitization system, and you can do it for fun, you don’t need to be late on your mortgage payments or anything.
There does seem to be a risk associated with asking to see your note, however, namely to your credit score, which is bullshit. There’s also a form letter of complaint if your bank somehow doesn’t come up with the answer.