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Contrarian Capital…not so much
With a name like Contrarian Capital one would think this Greenwich, Conn. hedge fund would have been savvy enough to sniff-out the impending trouble at Lehman Brothers. But apparently, the managers of Contrarian weren’t contrarian enough.
A week ago, Contrarian filed a rather large $100 million notice of claim in the Lehman bankruptcy, an indication that it was a bit too bullish on the failed investment house. But what makes the claim really interesting is that it stems from losses on Lehman-issued structured notes–something often sold to retail investors.
I’ve been writing a lot about structured notes being a terribly flawed investment product. The main problem with structured notes is that they generate big fees for investment banks and often are falsely pitched as conservative investments. Many are described as being “principal protected.” But as the Lehman experience has shown, that guarantee means nothing if the issuer goes bust.
Additionally, the main feature of a structured note–an embedded derivative that tries to capture the price increase in an underlying basket of stocks, commodities or a particular index–is something that often can be replicated by a investor without the aid of an investment bank. And the embedded derivative is notoriously complex and simply adds more counterparty risk into the financial system.Â
Investor protection, Singapore style
Who needs a whole new government agency to protect consumers from irresponsible banks? Authorities in Singapore have taken a refreshingly straightforward approach in tackling banks deemed to have been less than scrupulous when selling structured notes dragged down by the failure of Lehman Brothers: they banned them.
The Monetary Authority of Singapore on Wednesday banned 10 banks from selling structured notes until they can prove that they have improved processes to highlight the risks involved. Banks including DBS and ABN Amro, now part of Britain’s Royal Bank of Scotland, are out of the business for at least six months. Hong Leong Finance receivd a two-year ban. (The full list is here.)
Scoring investment risk
The Bank for International Settlements is thinking the right way in calling for a global standard of ranking financial instruments based on their risk and suitability for different kinds of investors.
The BIS Annual Report argues that financial instruments, markets and institutions all require reform if a truly robust system is to emerge. For instruments, it means a mechanism that rates their safety, limits their availability and provides warnings about their suitability and risks.
Goldman fills the Lehman void
Lehman’s collapse left a big whole in the world of structured products–a largely unnecessary investment vehicle that’s been all too popular in Europe and Asia. But it seems Goldman Sachs is rushing in to fill the void.
A week ago, a three-month-old Goldman Sachs subsidiary filed a registration statement with Irish authorities for the future sale of structured notes in the UK and elsewhere–but not in the US. The so-called “base prospectus” filed by Goldman Sachs Financial Solutions PLC is the second structured note offering a Goldman subsidiary has filed this year with Irish regulators.
Et tu Schwab?
Discount brokerage Charles Schwab may be facing a Lehman-sized headache.
It appears some Schwab brokers were actively selling so-called structured notes–derivative-like investments–that were issued by the now bankrupt Lehman Brothers. The structured notes were pitched as principal protected, meaning investors might not make a lot of money if a strategy failed, but they wouldn’t lose their initial investment either.
The only problem with the sales is pitch that the Lehman issued structured notes were guaranteed by Lehman. The notion that an investors’ prinicipal investment was 100% protected went out the window when the Wall Street firm filed for bankrupty last fall.
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The Wall
