Several financial institutions sold these credit-linked notes to their customers. The customers were told that their monies were invested in a basket of bonds issued by highed rated companies. The chance of failure of any of these reference entities was small, and even if it materialises, their loss will only be a proportion of the invested capital, due to the diversification of the risk.
This turned out to be an incorrect description of the actual nature of the notes. The invested capital was actually used to provide the security for credit default swaps on the reference entities. If any of these entities failed, the entire capital would be lost. Instead of diversifying the risk of failure, they are taking six to eight times of the risk of failure of any single entity.
The capital was actually invested in other assets that carry their own credit risk. This adds to the total risk of loss of the capital.
The actual structure of these notes were contained in several hundred of pages of a prospectus and pricing statments. The documentation was not clear, even to knowledgeable financial experts who spent many hours to read them. Many people feel that these documents are written to conceal the real nature of the structured products.
The actual return received by the product issuer was considerably higher (due to the extremely high risk) than the yield of 5% given to the retail investors. These excess gain was earned by the issuers but was not disclosed in any documentation. There were several devices created to hide or siphon off these profits.
Due to the global recession, many credit linked notes failed, causing severe losses to the retail investors. The dishonest act was in the creation of these products, attempts made to hide the true nature of the risks and to siphon off the excess return to the product issuer.
Most distributors of these products were not aware about the true nature of the products and had negligently misrepresent the products as being safe for retail investors. They were only focused on generating large volume of sales to earn an attractive rate of commission.
To avoid being cheated, it is important for retail investors to avoid all types of structured products, especially in an regulatory environment that is weak in protecting retail investors.
Tan Kin Lian
3 comments:
The raw materials that go into the design of a financial product are getting expensive and to give a decent return and low cost with these materials is not possible.
Either the manufacturers like insurance companies continue to use the same materials and combine them with other materials to charge higher price and risk or have layers of frills to hide the rotten core and market them as life style or status symbol products good to have or appeal to the senses or have benefits that can hardly happen. This is dubious trend in so called product innovation.Some products have fancifool names to fool you.
Is 2.2% attractive after holding for 5 years?
Is 1.5% attractive after 25 years?
Can a person be afflicted with a second cancer?
What is the likelihood of a cure for a cancer even after a remission of 5 years?
What is the probability of a first stage cancer developing into a full blown cancer?
Recently there were a lot of products with central benefits similar to the above.
The insurers are no idiots.They have packaged their products with benefits that you won't benefit but charged to the premium. New products are meant to generate profit and revenue and for their salesmen to sell. Salesmen need new products to sell, to have an excuse or something to talk to their clients.
Are 'new' products getting better?
or can they be better?
How? better in term of rubbish? or in term of return and protection?
When we buy insurance we expect lower cost at higher coverage, right?
When we buy a saving plan we expect higher return at lower risk, right?
This is called innovation, improvement, enhancement..
HOw much was a colour TV 10 years ago? Now?
How much did you pay for a flat LCD screen a few years ago? Now? The list can go on and on.
Can we say the same for insurance products? NO!!! yet they bullshit us, they lie to us, they lead us by our nose and use words like attractive, revolutionary, live life to the fullest when they are NOT. What do they take us? I am telling you guys. They are getting dishonest like the Wallstreet guys.They take us as fools and suckers because they know almost all of us are NOT financially savvy; we are clueless and yet they tell us it is CAVEAT EMPTOR.
Look , the banks are rejecting every investor's claim for compensation because you are educated.They tell you in the face.. so what? The empire must strike back.
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I agree with Mr Tan Kin Lian to avoid structured products altogether. They are just investment which bets on certain event happening or not happening, i.e a form of gamble. Speaking from being a victim of such products, I can tell you when people wants to sell you the products, they will cover all the good points only. After you have signed on dotted line, you have no remedy even if you cried hearts out all the way to MAS or MP.
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