For far too long, brokers have been selling their older clients complex investments known as“structured products.” Structured products are the black boxes that bedeviled Wall Street in 2007-2008 on a nearly catastrophic level. They continue to be sold in smaller packages to Main Street investors. While some of them may manage risk to some degree, they are difficult to understand and pose myriad risks to unsuspecting investors. These products are so risky, and so costly in fees, that some of them are almost sure money losers. They entered retirement portfolios like Trojan horses, and then destroyed people's life savings. Yet the financial meltdown of 2008 has not chastened Wall Street. Brokers and banks continue to sell these high-risk investments to people who can't afford major losses. Last year, banks and brokers sold more than $52 billion of these products — including at least $32 billion by the top banks alone — mostly because they are hugely profitable to the banks and brokers themselves.
Individual investors have lost at least $113 billion and counting from Wall Street's most toxic retail investments, which go by myriad names such as reverse convertibles and principle-protected notes or enhanced notes. Actual losses could be ten times that, since most burned investors don't confront their brokers or win back their money.
Many individual investors are still struggling to recover catastrophic losses suffered from investing in complex derivative-based vehicles that tanked in 2008. Now, long after the top banks were bailed out and recapitalized by taxpayers and the Federal Reserve, Wall Street continues to sell these dangerous complex products, which lie in wait, ready to unleash a shocking new wave of financial pain.
This latest round of Wall Street chicanery involves opaque derivatives once sold exclusively tosophisticated institutional investors, who only held small portions of them in multi-billion-dollarportfolios. In recent years, these complex “structured” derivative products — wagers based onother financial instruments — have been repackaged by Wall Street as ways to preserve principal for yield-starved Main Street investors.
Few investors fully understand what they've been sold, or understand that these products are like a ticking time bomb. When these products are sold to seniors, as they frequently are, it threatens their retirement security, as the investments are loaded with risky derivatives and contain no viable income guarantees. Even when investors discover that they've lost money, the system is designed to thwart efforts to recover such losses.
This trend was documented by more than a year's worth of research involving interviews withinvestors, state securities regulators, investors' attorneys and officials with the Securities and Exchange Commission (SEC). This paper examines what these investments are, how they are sold and what Congress and the SEC need to do to protect investors.
This paper was the product of a collaboration by The Investigative Fund at The Nation Institute, now known as Type Investigations and Demos.