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The Hidden Leverage In "Shiny Objects" - Banks Sell Record Amount Of Equity-Linked Structured Notes
Banks are selling a record amount of U.S. structured notes tied to the stocks of fast-growing, volatile technology companies such as Facebook and Twitter. As Bloomberg Briefs reports, sales of securities linked to Facebook soared to $457.6 million this year, more than double the $204.2 million issued during the same period of 2013. Bloomberg notes that investors are flocking to products tied to social media companies, where more volatile share prices help banks improve structured-note terms that have been hurt by low interest rates... and issuers are "trying to put shiny objects in front of the client," as the BTFD mentality gets increased leverage (and downside risk). Investors have purchased $1.88 billion of structured notes linked to the 10 most popular technology stocks so far this year - 31% more than the same period in 2013 - and $32.7bn equity- and commodity-linked notes this year alone (up ~10% YoY). As we warned last week, counterparty risks are rising.
While we showed the payoff structures of various notes last week, Morgan Stanley sold $13.9 million of notes linked to the S&P GSC Brent Crude Index. The 20-month securities, issued Dec. 10, pay 1.5 times the gains of that index, and proportionate losses if the gauge declines, with all principal at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission.
The 7 most actively traded equity-linked structured notes this week were all energy-related...
And by way of example - this is the performance of the most-actively traded equity-linked structured note this week... 50% capita loss in 4 months
Europeans love these deals...
Spanish buyers of structured products are sacrificing capital protection and accepting longer maturities as they chase returns amid record-low interest rates.
Maturities of three to four years were common in past years, but "we are now quoting seven years" for products that pay above-market coupons, said Alfonso de Miguel, head of global structured solutions at Banco Bilbao Vizcaya Argentaria SA in Madrid. At Banco Santander SA, terms have risen as high as eight years, according to a Madrid-based spokesman for the bank.
...
Societe Generale is selling more capital-at-risk products that tie returns to the worst-performing of several assets, Munoz said. The bank is also improving terms by offering more notes that include "knock in" options that can leave an investor with potentially steep losses if a price barrier is breached.
Credit risk is rising - counterparty contagion fears rise as structured notes are typically unsecured debt. That leaves buyers in danger if the issuer fails, as happened with Lehman Brothers Holdings Inc.
Who is the biggest issuer of equity-linked structured notes...
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As we concluded previously,
In the mid 2000s, it was massive one-way levered bets on "house prices will never go down again." When the cracks started to appear, the mark-to-market losses in derivatives led to forced liquidations and snowballed systemically. In the mid 2010s, it is massively levered one-way asymmetric bets on "stocks or commodity prices [oil] will never go down much for long ever again."
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And of course, no one will talk about this (or suggest it is "contained" until the loss of capital collapses some big name fund).
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The race to the bottom.
It is an odd investing world when new highs on the stock markets can also represent new lows in investment world.
Snake oil salesman have been around since the dawn of time. Their spiel appears to be perfected though. Sucker born every minute and two to take him as PT Barnum would say.
Lemme see from my structured days if I remember how to do this.
1.) Identify crap that "muppets" are likely to like to buy.
2.) Make structured note linking final payment and /or interest payments to "crap they want to buy"
3.) Have positions already in place to profit from increase or decrease in value of such "crap they want to buy"
4.) Sell "crap" note to "muppets" with return distribution tables showing Ginormous gains if "Crap" increases in value. Soft pedal downside risk terminating in "worthlessness" ('Course that "crap" can't go to zero!)
5.) Sell "crap" to clients er, "muppets"
6.) Regardless of direction of said underlying, resultant cost of debt to issuer is "way the fuck too cheap" as head of trading desk and IB structured note departments had explained to Risk Manager and Funding Source Desk Guys
7.) Profit from sale of "crap" is credited directly to bonus pool as funds not needed for operations otherwise being funded by Fed at 0.05%, after taxes
8.) Buy new Jag F Type for high school graduation gift for daughter, along with booby job and lip botoxing
Of course, the machinations described herein are way over simplified and by any stretch of the imagination can be picked apart easily, but suffice, nonetheless as a good description of process.
Now, where'd I leave those sell tickets?
Yeah, pretty much. Makes you wonder..... if they're so fucking awesome, why sell them to others at all? Just plow all you own money into it and keep your mouth shut about all the money you're making.
" Makes you wonder..... if they're so fucking awesome, why sell them to others at all? Just plow all you own money into it and keep your mouth shut about all the money you're making. "
Every time I ask that question I see the same ol' deer in the headlights look.
I asked this fellow who was about to plough it all into Facebook: why would Goldman Sachs, the Russian Mob, and rock singer Bono, all be in such a hurry to sell out to YOU if THEIR investment was really going to the moon and never coming back down...
He was struck SPEECHLESS.
So, about the fellow who bought the Facebook IPO, when Goldman was selling, how is he doing on the investment?
Probably doesn't speak to you any more.
I've found that it is very hard to buy nything if there are no sellers.
"trying to put shiny objects in front of the client"
Happens to me everytime I go to the Phyzz shop. Love them shiny objects.
Indeed, NoDebt. Everytme I go to Las Vegas, I note that the Mob and the Corporates aren't playing the gambling games. And the casinos cost several Billion $ to build, the buffets are now all north of $40/plate and you still can't get a free cup of coffee in your room.
A cynical fella such as myself begins to wonder if the games are such a great deal.
MUST CHASE YIELD!
Damn knucks, that's easier than hunting cows.
"Just insert the word oil."
We can always create a new 2014 Pearl Harbor with Obama & Wookie on the Island. /sarc.
Pavement - Grounded
won't be long. tail will wag the dog. rinse, repeat.
http://variety.com/2014/film/opinion/how-obama-took-sonys-crisis-from-ba...
"Patience" Glue sniff.
This is what happens when you take one side or aspect of a trade, i.e., the benefits of artificially low interest rates. Your home and car loans are artificially cheap while grandma's retirement account not only cannot move off the dime but has to leverage up the risk to get any return.
When grandma's small $100k retirement account makes no interest to supplement her Socialist Security check you know what happens? Grandma has to start eating away at the principle to make ends meet. Maybe she takes out the $5k she should have made in interest this year. Her account is now down to $95 and there is still more pressure on returns. If it is in a retirement account, the fund director now has to buy some sort of leveraged position or make commodity bets or other things that can easiyl knock another 25% or more off grandma's account.
However, the Prez will trumpet new stock highs as evidence of his economic genius.
These sound worse than annuities. And that's saying something.
An awful lot of old geezers get screwed on annuities but that takes time
The criminals are constantly creating new, faster and more efficient ways to legally steal from everyone
Its a sickness
LOL a friend of mine was pressured from his bank to buy a bunch of this shit for his mega portfolio.
Would be funny as hell if he got back bagels.
Good to see You Christian!
Happy Holidays, Bro.
Social Media Backed securities are an American right. It's in the constitution.
We need to make sure the government is ahead of the curve here and no red lining is happening in the sales of these assets.
Relying on shit my kids do on their tablets and phones for retirement income has to rank up there in terms of dumbest shit ever.
Paul Krugman is in a fetal position with his thumb up his ass.
weapons of financial mass destruction. Let's hope this time...it leaves no banker behind. Wipe the entire wall street fraud machine away. Let normal bankers regain the upper hand!
How levered are these things? anybody know?
If it is just investing in stoks, then should be ok with a 10 yr horizon.
BUT- It they are levered like futures then they will loose their asses....
The muppets is what I am refering to...
Why the down arrow?
Just wandering how levered these products are?
I don't get the junk either. I also wonder how leveraged they are. My guess would be, "very." I'm guessing it's the equivalent of buying options on a bar pulltab.
Alabama Mexicans Bitchez!
hey guys,
anyone want to join me and securitize divorce settlements??
im sick of my fucking lame corporate job and want to get in on the fun while we race to the bottom. i want to fly in private jets and bang high end call girls
Now that CONgress has passed the Cromnibus bill, we the taxpayers are on the hook, so why wouldn't these fidouchebags take insane risks? CONgress blows!!
The issuance of these types of structured notes is a great contra-indicator. I remember how many RevCons were issued leading up to the 2008 collapse. The yield hogs are really stretching once again.
Look out below....