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Structured Products Back In The Line Of Fire

It seems small retail investors are still a glutton for punishment. A number of retail investors learned a harsh lesson last year when the convertible feature of their reverse convertible bonds kicked in and their high yielding bonds morphed into rapidly sinking equities. There are certain varieties of structured products that retail investors can take issue with because they weren't fully aware of a seemingly minor structural mechanic that came back to bite them. This isn't one of them. Even by retail investor standards, the key mechanic, the knock-in level, is spelled out clearly.

An 85 year old retired radiologist has filed a complaint with FINRA looking to recoup $75k in losses he suffered from his reverse converts. This is entering some seriously dangerous territory. If we're going to allow selective investor financial amnesia to qualify as evidence of wrongdoing by banks, structured products will be nothing more than a winning lottery ticket for retail investors.

"I had no idea this could happen," says Dr. Batlan, a resident of Clifton, N.J. "I have no desire to own Yahoo stock or the others."

Reverse Converts: A Nest-Egg Slasher? [WSJ]
Update: Mr. Batlan's law firm, Zamansky & Associates, is reporting that the Citi broker who purchased $300k in ELKS allegedly did so without his authorization.
Reverse Convertibles and the Cautionary Tale of Dr. Batlin []


Today In Swiss Banks With Creepy But Defensible Structured Products

I don't really understand it but the TVIX thing is creepy fun. If you haven't followed it, Credit Suisse issued this exchange-traded note called TVIX that was a 2x levered bet on the VIX. They suspended new issuance about a month ago due to position limits, and people were just so damn excited to own the thing that its price crept up to 189% of its fair value, where "fair value" is a reasonably easily measurable thing based on the formula in the TVIX prospectus. Then last week Credit Suisse announced that they would be creating more units, and the price plummeted to and then through fair value, which is what you'd expect to happen. Except that it started plummeting a few hours before that announcement, which is Suspicious. So of course people are sad and so there's a Bloomberg Brief with sort of sad-funny quotes like: “When it started to fall, I bought more because I couldn’t believe how low it was going. I didn’t realize I was playing with a hand grenade.” – Michael Gamble [heh! - ed.], 67, who doubled down on his TVIX investment before the price collapsed. Investors “all think: ‘Oh, I’ll just buy these things, I’ll be hedged against volatility and everything will be wonderful.’ And now they’ve seen the market goes down and their volatility protection goes down too, and they’re going ‘Hmm, what happened here?’ These people are going to have to pay a really expensive lesson.” – Larry McMillan, who manages $30 million as president of McMillan Analysis Corp. So, yes, Larry, they are going to pay a really expensive lesson. But what is it? Stephen Lubben has a little thing in DealBook today where he frets: