Structured Products

Easily Explained

Get Adobe Flash player

Structured Products on the dock II

Every now and then, while having a conversation with persons who do not work in the banking industry, the topic of the discussion focuses on the subject that define my profession: structured products. Some reactions are quite extreme: 'evil products' and 'dangerous things' are just two of the many negative descriptions I heard in the recent past. Despite the fact that the persons I discussed with were well educated and knowledgeable in other fields, they referred to the products I deal with on a daily basis as if they were alive and malevolent. Strange, isn't it? How can an object, even an immaterial one, possess an attribute normally reserved for living beings? In my book, I often compare structured products to cars. To accuse a product to be the source of one's woes would be the same as to accuse the car of the damage being done after an accident. Do you sue the car after an accident? Normally you sue the driver. On the other hand, after an inspection has been conducted, one may conclude that the car was faulty (maybe someone forgot to mount the brakes) and the constructor of the car should be sued. Maybe the car wasn't fit to be driven to begin with, and the police should have banned it from the roads to begin with. Or maybe the there was a nail on the road, or an earthquake toppled the bridge on which the car was driving. Whatever. But you don't sue the car. The same goes for structured products: one may accuse the representative, the trader, the investment advisor or the state for not having done their job. One may even accuse himself for having done a foolish thing. But the products themselves are innocent; they are just passive things. I understand that persons can become angry when the major part of the value of an investment evaporated, but their anger is often directed at the wrong target. They focus on the product instead of concentrating their anger on the representative, the advisor or, let's face it, on themselves. More often than not, greed lures investors to investments that are not optimal for their risk profile. For instance, when a coupon amounts to six times the risk-free rate, there is risk involved, even if the product seems quite safe. Even if the coupon amounts to just 1.5 times the risk-free rate there is some risk involved, and the investor has to be ready to take a loss. What often happens after investors have experienced substantial losses with structured products, they build walls around them; 'never structured products again' is a classical reaction. Even though this is a perfectly reasonable human reaction, a better one would be to analyze the problem and to try to find a solution to it. Maybe the product was not well explained (what did the investment advisor tell you, what didn't you understand and why? Can you still trust your investment advisor?), maybe the product didn't fit your risk profile (avoid these products in the future; who told you to invest in them to begin with?) or maybe it was just bad luck and you invested just before the subprime crisis began (did you lose approximately as much with other risky investments like stocks?). The last crisis unmasked a lot of inefficiencies, fraud and greed in the banking industry, greed being also an attribute of certain investors who leveraged their portfolio or who took risks they should not have taken. Making the effort to understand the products is of much greater value than simply placing them on the dock. Hence the need for more education both in the banking industry as well as for the investors. One needs a license to drive a car. Maybe one should need a license to sell or invest in structured products.