As time passes each age sees themselves (for the most part) on the cutting edge of …fill in the blank. Whether they are or are not is in many ways debate-able but to be on the cutting edge often requires complications. Some recent conversations have surrounded the idea of keeping complexity out of certain areas. How should that choice be thought about?
Consider that Leonardo Da Vinci stuggled with the concept zero. Although its still may be a struggle when your going through algrebra in primary school it no longer pushes the great minds of our time. My point is the because something is complicated doesn’t mean that it should be scraped.
I would suggest considering the following question, ‘does the construction, that happens to seem complicated, have value or is its value derived from the complication itself?’ What do I mean. For example sales people will use complication to obfuscate the truth while remaining ‘honest’ in order to close a sale. I was reading something recently where a CMO market participant was quoted as saying, “We think (they try) to obfuscate the risk associated with each one of these tranches. We think it is a kind of deliberate thing on the part of the dealer community to make it very difficult to understand the (securities)”
I was surprising to see that the quote was from 1993. If the ‘CMO market participant’ is right and the complication is for the sake of obfuscation then the complication is not (net) valuable. This makes one reflect, bond basket products have been complicated for a long time, but they haven’t always blown up. Does complication lead to blow up? No. Does complication make blow up more likely? Yes. Does complication have value? Maybe. So should these bond baskets continue? They will need to show that the risk/reward to increased complication is better than it has proven to be so far.
