Structured Notes: The Retail Broker's Own Little Synthetic CDO

In the coming weeks, I’m going to put the entire Structured Products and Reverse Convertible business on blast, but now is not the time.  A new article announces the fact that $31.9 billion worth of this stuff has been sold to customers so far this year, almost 60% more than by this time last year.

We had this smarmy wholesale punk from LaSalle Bank‘s strutured products group visit my branch a few years back.  He did his powerpoint dog-and-pony show for the brokers on reverse convertibles, which I now consider to be the retail analog to the CDO garbage that big i-banks were selling to dumping on institutions.

Suffice it to say, anyone who left the meeting and participated in this trash for their clients learned the hard way that they were risking essentially 100% of their principle for a measly 4% short-term yield.  This while owning paper backed only by the credit of some of the trashiest banks on earth (Lehman was huge in reverse converts, for example).

We’ll cover this topic in more depth at a later date, but for now check out this BusinessWeek exposé for a primer:

Leona Miller, an 84-year-old retired beautician, says she was seeking safe and steady income from bonds two years ago when she bought securities recommended by her Wachovia (WFC) broker, Robert Baldacci, paying 9 percent interest. Within six months, Miller lost about 30 percent of her $20,000 investment, and the bonds were converted into shares of Merck (MRK) in a falling stock market. “I just wanted him to make some money for me, like anybody else,” says Miller, who lives in San Diego. “I still don’t understand too much about it.”

Miller had bought a structured note—a bond combined with a derivative. In her case, it was a reverse-convertible note with a knock-in put option tied to Merck stock.

Read the rest, then stay tuned for how I really feel about these notes and derivatives.  It won’t be pretty.


Individual Investors Duped by Derivatives (BusinessWeek)

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