This is a shockingly absurd story.
Goldman, Citi and the rest of the gentlemanly, altruistic global banks invented yet another disgraceful product at or around the peak of the stock market a couple of years back and they aimed it, not unlike a loaded gun, squarely at the foreheads of wealthy Chinese businessmen.
The fact that your average Chinese entrepreneur or executive had more money than they could spend in 12 lifetimes probably made a product as dumb as the “Accumulator” easier to sell than it should have been.
Here’s what you may have missed out on unless you are the CEO of China Chocolate Company Ltd or something:
What is this too-good-to-be-true investment? The sellers call it an “accumulator,” but disillusioned buyers have come to know it as the “I-Kill-You-Later.” Here’s how it worked: You commit to accumulating large blocks of shares of a Hong Kong-listed stock every day for, say, 12 months at a discount to the share price when you sign up. You could load up on lots of a $10 stock for just $8. Easy money.
What’s the catch on the I-Kill-You-Later? When the stock dips below that discount price, the amount you are automatically on the hook to buy doubles! Wait! It gets even sicker: If you don’t have the ready cash to honor these stock purchases, the bank either forces you to come up with the rest of the money to cover the entire program OR it simply advances the money to you whether you like it or not, and puts you in debt for the principal of these purchases plus the interest.
Someone should explain to the sales people of this product that the penalty for white collar crime in China is pretty expedient…it’s called Execution.
This story has been pretty quiet so far because of a couple of important factors. First, there are no class action lawsuits in China, and very few of the tycoons who have been crushed are coming forward to press individual lawsuits. Additionally, in China, to admit to being taken advantage of (especially by Western bankers) makes you look weak and could destroy your reputation in the business world.
Most of the sales of this stuff went on in Hong Kong, and regulators estimate that there’s $23 billion still outstanding in Accumulator programs there. Oh, and the salespeople are still pushing this both in Hong Kong and in Mainland China as I write, according to Forbes.
Long live derivatives.