They make it so the interest on your mortgage is 3% instead of maybe 3.5%. That's a lot of money that you and many other normal people get to save because they do the work of connecting you to institutional investors via packaging your debt. They might take a cut and it may look big in nominal terms but barring fraud everyone is better off.
Actually that has shown not to be true over and over throughout the history of the derivatives trading market. Nominally and in a perfect world that would be true. But as we have seen that is not the functional reality. It keeps happening that derivatives are used to hide risk rather than actually predict or insulate against it. To quote a famous politician:
"There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, 'Fool me once, shame on...shame on you. Fool me — you can't get fooled again.'"
And to quote a head of a self-regulatory body in charge of such things:
In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans."
Sorry, I deleted my comment. I decided to explain here why because it's sort of funny! So I have been helping a friend of mine with all the math around his new adventure, buying his first flat. Usually he just gives me the numbers directly from the bank and I work with them without questioning much because, although I have worked in finance before, I know jack about mortgages. Still, I had the bank simulation with myself so I deeply believed 0.16%, the interest the bank put on his simulation, would be around the same for everybody else.
As you can guess, it's not even close. That's why I deleted my previous comment, sorry. So why did he have such a nice interest rate? Well, it seems like there's a bunch of discounts on the banking system in Europe for mortgages. For example, there's a really big discount for disabled people, they will only pay, on a variable rate, 65% of the 3m EURIBOR thus 0.16%. No spread whatsoever. Interesting, isn't it?
