Sometimes “Safe” Doesn’t Mean Squat!

November 11, 2008

I wonder how many investors were told that their structured product was safe?

First off, what’s a structured product? According to this article ($) in today’s Wall Street Journal, structured products are…

“…issued by big Wall Street firms, investors can get exposures to commodities, stocks or other investments without actually owning those assets. The products may promise to give investors a portion of any gains in, say, U.S. stocks or Asian currencies while offering some protection from market losses.”

The risk?

Bankruptcy of the issuer!

“When an issuer goes belly up, as Lehman Brothers Holdings Inc. did in September, structured-product investors are generally left standing in line with other creditors and may face a long wait to determine how much, if anything, they’ll be able to recover. Some Lehman structured products now are trading for less than 10 cents on the dollar, according to SecondMarket Inc., a marketplace specializing in illiquid assets, which says it has heard from investors holding more than $2 billion worth of Lehman structured products. In Hong Kong, investors in Lehman-linked structured products have staged protests at numerous bank locations.”

I wonder how many advisors considered the bankruptcy of Lehman Brothers a possibility? I’ll be honest: I didn’t but I also wasn’t selling structured products. I wonder how many brokers rolled their eyes at mom and pop investor because they questioned the soundness and financial backing of these products?

The problem is that Wall Street designs all these complicated products (for an idea of how complicated these products are, read this), which are then sold by brokers who themselves don’t fully understand them and the risks associated with them. And, investors jump at the chance to purchase something that is both “safe” and offers a way to make a little extra dough. The broker’s happy because they make a nice commission, the issuer is happy because they get a nice stream of income, and the investor is happy because they feel “safe.” The only one who gets screwed when these products don’t work out is the investor. You won’t see the broker giving back any of their commissions, nor will you see the issuer offering to help out because they are bankrupt. The investor is left holding this bag of crap.

All of this brings to mind another question:

How safe are insurance products that are backed by the insurer? Maybe someone from the insurance industry can fill us in…

4 responses to Sometimes “Safe” Doesn’t Mean Squat!

  1. I think this offers a good reminder that there is no such thing as a “safe” investment. All investment carries with it the risk of loss. No matter how fullproof it appears.

  2. Miranda,

    You are correct. I also think investors would be wise to ask themselves who bears the pain if things don’t work out like they plan.

  3. I think most insurance-backed securities are fairly safe. People will keep buying insurance after all, and the companies will have to do *something* with all those premiums that exceed their costs. They’re unlikely to run out of money until we get some kind of taxpayer financed Universal Insurance Program (God forbid!).

    So when is the AllPoliticalMatters blog going to be up and running?

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