Structured Products

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.

On the 21st of April, a private bank in Switzerland published an advertisement in the NZZ, one of the most read newspapers in the country. In small print below the main message was written in German: "...therefore we do not let ourselves get drawn into speculative transactions and also do not sell structured products." Boy, they didn't get it. In an accident, they would probably be blaming the car instead of the driver - if there were anyone to blame at all. In the advertisement, it sounds as if structured products were the Devil impersonated. What's wrong with structured products? Those I now and structure make perfect sense and are usually safer than the underlying asset they are based on, at least from a risk point of view. They are certainly less speculative than other, more common financial products like options, futures or warrants. That is, perhaps I misunderstood the message and that bank (I'm not going to name it, they are not getting free advertisement here) doesn't take any risk, no stocks, no funds, no commodities. Maybe they just invest their client's money in government bonds; hopefully not Greek ones, hahaha. Seriously, statements as in this advertisement are just dumb; I feel sorry for the tree that was felled to produce the paper and for the wasted ink.

Disclaimers + sales restrictions = trade barriers On the right side of the homepage of this website is a menu with many issuer links. Each link redirects you to the homepage of an issuer. What do you see first? A DISCLAIMER! And all too often, a choice of countries with the request to select your country of origin. If you ever read all the small-printed stuff (often over 100 lines of text), were you all the wiser? I wasn't. In fact, I never read it. Given, I'm a product specialist, so I should know. But I am sure that no investor will get any information in the text that will help him or her choose the product that is right for his/her risk profile.

So apart from wasting the time of potential investors, it's utterly useless. It's even counterproductive. While trying out several websites, I couldn't help but notice how the total available number of products varied depending on the country of origin I selected when I entered the site. It turned out that similar products are not always offered for investment in all countries. Let me explain: take a floored floater; by selecting the country of origin "Switzerland", I get 8 products for a given issuer. No I go back and select "Germany"; now I get 12 products! They're all floored floaters, some have even identical features, but the German gets more choice than the Swiss! If anybody can give me a logical economical reason of why such a situation should exist, I'd be most glad, because as of today, I don't see any. Of course, there may be dozens of legal reasons, but frankly, legal hasn't to exist for the sake of legal. Sales restrictions are another useless bother. Why is every country developing ever more complex restrictions for informing investors about structured products? In my humble opinion, the only reason can be protectionism. As each country develops its own set of rules, it becomes increasingly difficult for issuers to act globally. Imagine that you're a market leader in your country, and you have developed an efficient cost-saving platform to handle your products. Your products have therefore more attractive conditions than those of your competitors. Now suppose that you would like to offer this platform and products to potential clients in the neighbouring countries. The costs are immense! every single document has to be adjusted for each country and the platform must deliver different information or reports to each financial administration! You'd have to redesign and reprogram your whole setup, which is daunting in terms of costs. It doesn't prevent an issuer in a neighbour country to continue placing cost-intensive products with worse features than yours, though. Can somebody please file a complaint at WTO, please?