Derivative: A security whose price is based upon or derived from one or more underlying assets. Most derivatives are characterized by high leverage.
People might think that the role stockbrokers and their broker-dealer firms played in bringing the world to the brink of financial ruin through the sale of complex derivative products would lead them to be more cautious as they risk other people’s money. They would be wrong.
According to a research report released last year, despite the financial meltdown of 2008, Wall Street has returned to its pattern of selling high-risk, inscrutable complex derivatives to those who can least afford the risk. This trend was verified by interviews with investors, state securities regulators, investors’ attorneys and officials with the Securities and Exchange Commission over the course of a year.
Titled “How Safe Are Your Savings? How Complex Derivative Products Imperil Seniors’ Retirement Security,” the report was written by John F. Wasik of Demos, a non-partisan public policy research and advocacy organization with its headquarters in New York City.
The report states that brokers and banks continue to sell high-risk complex derivatives to people who can’t afford major losses.
In 2010, banks and brokers sold more than $52 billions’ worth of these products, mostly because they are enormously profitable to the banks and brokers themselves, and not because they are prudent, sound investments for senior citizens whose main goal is to safeguard the only money they have.
Brokers continue to sell older clients the complex investments known as “structured products,” the opaque instruments that were a major cause of the Wall Street implosion of 2007 to 2008. While structured products are not being sold at the level they were then, they continue to be sold in smaller packages to average American investors, including to senior citizens who may not fully understand the implications.
Some of these products do manage risk to a degree, but they are so difficult to understand that they are unsuitable for all but the most sophisticated investors. They are so risky, with such high costs and fees, that some are almost sure to lose money.
In the past, the report says, “They have entered retirement portfolios like Trojan horses, and then destroyed people’s life savings.”
As of 2010, individual investors had lost at least $113 billion from these toxic complex derivatives, the report says. They can go by many names, including reverse convertibles and principle-protected notes or enhanced notes. Actual losses from complex derivatives could be ten times as high as reported, since injured investors often fail to fight back. Many people are still trying to recover from the heavy losses they suffered as a result if investing in complex derivatives that turned worthless in 2008.
We all know the story: the big banks were bailed out by the Federal Reserve and the American taxpayer. Unchastened and unashamed, Wall Street continues to sell these opaque derivatives, and it’s hard to predict whether these new products will lead to more financial suffering.
The Demos report says that the latest Wall Street gambit involves complex “structured” derivative products. These derivatives were once sold only to sophisticated institutional investors, who would have but a small exposure among a multi-billion-dollar portfolio. In the past few year, however, Wall Street has repackaged these structured products — basically bets placed on the performance of other financial instruments — as a means to preserve principal for mom and pop investors.
Few of these “Main Street” investors completely understand what they’ve been sold, the report says. Nor do they understand that these hyper-leveraged products can become worthless overnight.
Moreover, structured products are frequently sold to senior citizens, the report says. As a result the seniors’ retirement security is threatened because the products are composed of risky derivatives with no income guarantees. To make matter worse, the system is rigged to impede investors’ efforts to recover any money they have lost.
If you have been sold an unsuitable complex derivative product that has put your financial security in jeopardy, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.