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cheapbag214s · Posted: Mon 21:29, 12 Aug 2013 Post subject: carry risk Knoxville News Sentinel

carry risk Knoxville News Sentinel
When I was a kid,[link widoczny dla zalogowanych], banks would give you a toaster for opening a new account. It seemed like a small, generous gesture, but what it really did was add to the bank's overhead. Since very little of a bank's expenses are fixed, customers paid for those toasters with higher fees or lower deposit rates.
The toaster complicated the deposit or loan transaction,[link widoczny dla zalogowanych], making it more difficult for the customer to see the true cost of doing business with the bank.
Hiding these costs was not an accident, nor was it the last time this little gambit was used by the financial industry. The toaster is called a "structured product" today and if you want to understand most of them, you'll need a lawyer, mathematician, finance professor, accountant and actuary - possibly along with an English professor and arbitrator.
These products include things like 130/30 funds, principal protected notes,[link widoczny dla zalogowanych], structured notes and even proprietary mutual funds like the Morgan Keegan funds that forced Regions to pay a $210 million settlement and prompted it to seek a buyer for the beleaguered brokerage firm.
These products are almost always touted as safe but just as frequently aren't. They are sold as a perfect stock investment. They allow a manager to buy a significant amount of attractive stocks,[link widoczny dla zalogowanych], while short selling enough expensive stocks to keep his net stock market position equal to the fund's assets.
Did you follow that? A number of people thought they did five or six years ago, until most of those funds crashed terribly in 2007-2008. Now they're back.
Zurich-based broker UBS has paid more than $10 million in fines and restitution for losses related to its sale of so-called "100% Principal Protection Notes."
If the principal was protected,[link widoczny dla zalogowanych], how did investors suffer losses? The principal was backed by Lehman - which filed for bankruptcy only months after UBS was actively selling these bonds.
Some principal protected notes guarantee only 10 percent or so of an investor's principal, or provide guarantees only under certain circumstances.
One thing is guaranteed,[link widoczny dla zalogowanych], however. If the structure of an investment vehicle is so complex that the people selling it can't comprehend it, you can't either. It also means that you don't understand the costs and risks.
And if you don't understand it,[link widoczny dla zalogowanych], you shouldn't buy it.
I won't argue with the rant about structured products,[link widoczny dla zalogowanych], but I will pick a nit about the toasters. Giving them away is called "a promotion", and it brings in business. Now when running a business you have a choice: sit around and do nothing and hope customers come in,[link widoczny dla zalogowanych], or make attractive offers to *bring* them in. Advertising is one way. Public relations (as evidenced by a guy selling financial products who also writes a newspaper column on finances) is another. And yet another is "promotions",[link widoczny dla zalogowanych], whereby the bank increases its business, gets more deposits (and is therefore able to do more lending),[link widoczny dla zalogowanych], and coaxes money out from under mattresses and into the stream of American commerce.
The cost of the toasters isn't actually "the cost of the toasters." It's the cost of the toasters minus the profits that the increased business produces which, in many cases, means the toasters pay for themselves. (It's why food manufacturers offer coupons, too. They're not "free", but they increase volume,[link widoczny dla zalogowanych], adding to manufacturing efficiencies,[link widoczny dla zalogowanych], purchasing power from vendors, and sampling from consumers.)
Unfortunately,[link widoczny dla zalogowanych], those complex investments are owned not just by individuals but by some pension plans, mutual funds, and so on. Individuals may not be aware that they indirectly own some of these things.
Even those big fund managers can be unaware of all the risks. Information costs time and money [after all, the investor has to gather info and study it!]. Not everyone wants to do that,[link widoczny dla zalogowanych], and too many have relied solely on the ratings, most of which rely on past data rather than an educated look into the future.
Time for everyone to check what their funds actually invest in, as best you can, and decide if you're comfortable with it. And you don't need the toaster or the free investment seminar lunch that might come with it.
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