How safe are your savings?

May 17, 2011

Let’s say a broker or banker offered you a way of reaping market gains while protecting your principal. You’d jump at it, wouldn’t you?

Thousands did and were burned to the tune of more than $113 billion in complex “structured” products since 2008, including Florida businessman Charles Replogle and his 86-year-old mother. They were told that the principal-protected notes sold by UBS Financial Services were safe. He bought the six-percent-yielding Lehman Brothers notes from UBS for his mentally disabled brother and mother.

Replogle trusted his broker, a friend whom he had known since he was nine. The Replogles lost every penny of the $130,000 they invested in the notes when Lehman went bust in September, 2008.

“There was no mention of Lehman Brothers,” Replogle said. “I felt UBS deceived us. You can’t sell a guaranteed product and not guarantee it.”

UBS neither admitted nor denied that it was involved in wrongdoing, even though it was fined a paltry $2.5 million by the securities industry self-regulator FINRA on April 11 and ordered to pay $8.25 million in restitution for “omissions and statements that effectively misled investors.” UBS sold about $1 billion of these dogs.

(A UBS spokeswoman told Reuters on April 11 that the bank “pleased” to settle the case, which concerned “a limited number of investors who purchased certain Lehman principal protection notes during a discrete 3 1/2 month period of time.” She said a “significant majority” of UBS’s sales of Lehman structured products were conducted properly.)

If the Replogles were the victims of a Madoff-like Ponzi scam, you could shrug your shoulders and attribute the incident to outright fraud.

Yet “structured” products like the Lehman notes were — and continue to be — sold to investors by major banks and brokers. These vehicles are loaded with derivatives, which are risky bets on underlying investments. They were found in everything from plain-vanilla bond mutual funds that contained mortgage securities (that tanked) to exotic “reverse convertibles.”

I know this subject particularly well since I spent more than a year studying them under a grant from the Nation Institute and published by Demos, the New York-based progressive think tank.

Many of these highly risky products were sold to older, conservative investors who just wanted to get a better yield in a single-digit-return environment.

What’s the common thread in all of this? Wall Street continues to peddle opaque, illiquid complex investments that most people don’t understand. It was a $52 billion market for banks and brokers last year because it’s highly profitable. They promise to shield principal from downside risk, and use derivatives to do it — but don’t clearly disclose how they do it or the total risks involved.

Sellers of structured products win going in the door because of the fat commissions, underwriting fees and embedded costs you may never see. They get their money upfront, yet rarely give you daily pricing or the ability to sell back your investment with a full refund.

Sure, there may be some structured products that make sense. You can customize them to hedge against nearly any index or stock. But you have to weigh the outsized expenses and alternatives carefully. You may find a better deal writing an options contract or buying an inverse exchange-traded ETF.

If you don’t understand how a structured product works, don’t fall for the broker’s pitch. Walk away. Only buy one through a fiduciary registered investment adviser or certified financial planner who can explain them completely and tell you how they may or may not fit into your financial plan.

Brokers operate by a weaker set of rules that put their firm’s sales quotas above your best interests. Unless that changes with the SEC’s proposed “fiduciary standard of duty” for brokers — the SEC has this pro-investor rule on the back burner — you’re on your own.

Now for my Dr. Pangloss moment about this business: Shouldn’t Wall Street take the high road in protecting investors from the wretched excesses of the meltdown era? It would show the investing public that they have learned their lesson and want to do the right thing. Yet Wall Street wants to dilute or destroy pro-investor rules emerging from Dodd-Frank financial reforms and is fiercely lobbying Congress, the SEC and Commodity Futures Trading Commission to do it.

If anything, Wall Street has once again proven that their “principles” are more important than your “principal.” Greed is still good — for them.


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Hi John,

The issue here is the process of risk profiling of clients and whether it is adequate or not. Obviously it is not!

We can not change the past, but we can try to change the future process. Are you a contributor to debate on fiduciary duty? How do you think the process should be changed?



Posted by JackTaggerty | Report as abusive

Well said, John Wasik.

Posted by breezinthru | Report as abusive

Fiduciary duty is essential. It may not stop all of the chicanery, but it’s certainly a great front-line defense. Everyone who sells a financial product should be a fiduciary, including insurance agents. There should also be numerous barriers before older investors are sold risky products. Nobody should be sold a derivatives product unless they understand it.

Posted by johnwasik | Report as abusive

This is capitalism folks. If you take a gun and car jack someone’s vehicle the cops come after you. If you promise someone 20 percent return on their money a year and that it would be safe in your bank knowing that you are stealing the money and paying yourself $250,000,000 a year off the money you are known as a shrewd businessman as long as you tell the client one thing and have him sign papers that say another.

Like how could GM legally go bankrupt and screw millions of bond and share holders and now they come out clean having dumped $200 billion dollars of share and bond and pension liablities.

Madoff only got jail time merely because he did not have any money to pay off the right people to look the other way anymore. As long as his protection money was going to the right people they left him alone.

Posted by JEYF | Report as abusive

So did you notice everything you listed is a bad thing. Not to mention loosely affiliated with the term “capitalism”… folks. The discussion is on how to prevent things like those you mention from happening. You just say the word capitalism in an arbitrary fashion and list some stuff as if that protects the notion because its bad to bad mouth capitalism folks. So the rest of us folks should just learn to live with it rather than make it better huh.

why is it that Gov bail out funds that it would seem recreated liquid capital in Lehman Brothers… and UBS by affiliation (considering the story involved), why didn’t those funds repay the principal investment of Mr. Replogle. It seems like an example such as this should be one of the fundamental purposes, outside of preventing bank failure, to why the public money was given. “Principal-protected” and safe should translate to an IOU when they don’t have it liquid, and bank account $$$ if they do. Where in between did it disappear?

Posted by Spac122 | Report as abusive

Might as well just put the money tru a slot machine

Posted by Oompa | Report as abusive

I believe the financial mess was mostly the result of the derivative market. Although other things were responsible, without derivatives entering the picture, the financial “mess” would have been a somewhat milder “correction”. What worries me is that the same thing could happen again. Complex mathematics stirred together with greed.

Posted by 123456951 | Report as abusive

I believe the financial mess was mostly the result of the derivative market. Although other things were responsible, without derivatives entering the picture, the financial “mess” would have been a somewhat milder “correction”. What worries me is that the same thing could happen again. Complex mathematics stirred together with greed.

Posted by 123456951 | Report as abusive

The SEC’s attempt to require fiduciary standards for financial advisers has not been able to pass Congressional approval. In vestment banks and financial interests literally own the US Congress and government, with voter approval, so it is not likely that ordinary investors will have any protections from predatory practices. In fact, without being able to rig the markets and take advantage of “dumb” money, investment banks would not be able to make money in an honest manner.

Posted by Greenspan2 | Report as abusive

I had an uncle who was in the market for 40 years and he said it was the biggest floating crap game around. He put his money in utilities. You can make money in the market and in Las Vegas if you know how to play and know when to get in and get out. Better have a good supply of antacide pills too.

Posted by fred5407 | Report as abusive

I get it now, wall street causes recessions.

@Spac122 – You’re right, Capitalism is simply a tool. Unfortunately for us on main street, wall street uses it as a weapon of mass destruction.

Posted by Cynicalcubicle | Report as abusive

Predatory Wall Street practices will continue as long as politicians can be bought. As the current trend shows – this will go on pretty much forever.

Best to move your money to tangible brick and mortar assets and leave Wall Street to all the corporate welfare money consumers. They pretty much bleed everything dry with self serving bonuses and stock manipulation anyways.

Posted by Butch_from_PA | Report as abusive

If you take even one economics class, they’ll tell you that there is no honest and reliable way to beat the rate of inflation on an investment. If anybody uses the terms “guaranteed” and “higher returns” in the same pitch, you should know, just plain know flat out, that that person is lying to you.

It is possible to beat the average rate of inflation, it is even possible to beat the market. But any attempt to do so is a gamble, and that gamble is what you’re being paid the premium rate of return for. Any broker who tells you otherwise is a thief.

Posted by JBradHicks | Report as abusive

In the mean time, Vanguard’s assets under management are now over $1.4 trillion. It has never been easier, cheaper, or simpler to have a balanced investment mix with a safe well run institution than it is today. There is more and better advice on how to do that now than there has ever been before, and many, many millions of Americans are doing it successfully.

Posted by ARJTurgot2 | Report as abusive

I don’t think brokers are your buddy. You bet’cha….as long as politicians can be purchased by Wall Street, let the buyer beware…….especially when he/she says “trust me!” Criminal prosecution for these structured products will flourish. Prosecution is reserved for “little people” at the same time corporations and politicians are exempted from the law. I’ve yet to meet a fiduciary in the brokerage business or the banking business.

Posted by Wassup | Report as abusive

I recall that Maddoff inverstors received some restitution through SIPC. The UBC ploy effectively returned 1% more than nothing. Frankly, UBC should be nationalized, liquidated, and any proceeds returned to victims.

Posted by SanPa | Report as abusive

[…] or broker. After I wrote a column based on a study I conducted for The Nation Institute on May 17 exposing the dangers of these vehicles, the SEC and industry regulator FINRA issued two […]

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Posted by John Wasik | Analysis & Opinion | | Report as abusive