At the other extreme will be specialists that survive by doing one thing either very cheaply or exceptionally well. Predictably, the biggest winners from financial innovation will be companies, and families, that have complex finances. Banks already show signs of losing interest in people who want just plain-vanilla checking accounts. But as incomes and wealth rise, more people will find themselves thrust into the role of asset managers. That's where science comes in.
Financial engineers view every investment opportunity as a bundle of separable risks and rewards.
Their skill lies in teasing the bundles apart and parceling out components to the investors who will pay the most. A simple example is stripping apart the payment stream from a loan portfolio. The buyers happily pay a tad more to get what they want, which translates into a better deal for the borrowers. Far from Wall Street, in Minnetonka, Minn., financial engineers at Cargill Inc. are transforming the markets for stuff like eggs and sugar. It erases most of its own exposure to a spike in egg prices by artfully combining various financial instruments.