Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

Don’t Get Duped by Derivatives

admin by admin
September 12, 2011
in Uncategorized
0
0
SHARES
1
VIEWS
Share on FacebookShare on Twitter

Article of the Week from Money Morning

thief by Martin Hutchinson, Global Investing Strategist, Money Morning

It recently came out that a $1.2 billion derivatives portfolio that Goldman Sachs Group Inc. (NYSE: GS) managed for the Libyan government lost 98.5% of its value between 2004 and June 2010.  If a firm like Goldman will sit idly by while a client eats about $1 billion on a single investment, where do you think you and your portfolio land on Wall Street’s list of priorities?

The message here is simple: You can’t trust Wall Street – not with a $10,000 investment, a $100,000 investment, a $1 million investment, and especially not with $1 billion investment.  Goldman Sachs claims that the Libyans were picking the derivatives trades themselves. But that’s exactly what they would say.After all, if it got around that Goldman’s ace traders were capable of losing virtually all of their clients’ money, bonuses would fly out of the window along with most of the business. I’m sure the Libyan government would have offered a rebuttal if it weren’t being toppled in a civil war.

The Libyans no doubt did much of the investment decision-making themselves, but the real problem is that there was no basis of comparison for the prices of the derivatives products they were being given.

And that’s where there’s a lesson to be learned. As a retail investor, you have to be able to determine a two-way price quote for whatever investment you buy.

The investment landscape is littered with the wreckage of failed structured investments.  Between 2008 and 2010 already-strapped cities and states had to pay Wall Street $4 billion in termination fees to get out of various interest rate products that had gone wrong.

For example, there’s the exciting 2007 “Abacus” deal by Goldman Sachs trader “Fabulous Fab” Tourre, which lost European banks a total of $1 billion.  The investors in Fabulous Fab’s Abacus deal had no independent means of assessing the value of the subprime mortgages in the pool. These were large, “sophisticated” banks, but they deluded themselves with the risk/reward tradeoff they were taking on.

Losses are not confined to the notoriously murky derivatives investments, either. I would bet that the special Goldman clients who earlier this year bought privately offered shares of Facebook Inc. at a $60 billion valuation will end up losing big on their investment as well.

As investors, most of us are not rich enough to get Wall Street’s attention, but we should stay informed about how these firms are luring their clients into spectacularly bad deals.

That way we’ll all know what to avoid.

How to Avoid Becoming Wall Street’s Next Victim

The key to combating Wall Street’s bad deals is price transparency.

It’s no accident that Wall Street’s most profitable products are various types of derivatives, which are not traded over an exchange and whose prices appear only on traders’ screens. Complex structured products are even more profitable since no price at all appears in these.

Additionally, as we saw with Facebook, private companies do not have to give full financial information, and there are no comparables on which their pricing can be based.

So, generally speaking, you should stick mostly to publicly traded stocks.

Short-dated stock options are okay. They have a broad price spread, but that spread is quoted on many financial Websites. So is the “open interest,” which gives you an idea of how many buyers there will be for the option when you want to sell.

When it comes to longer-dated options, stick to those on a highly liquid index, such as the Standard and Poor’s 500 Index. Prices for many of these options are quoted out to December 2013 on the Chicago Board Options Exchange Website.

Bonds pose an even higher level of difficulty because bond price comparisons are harder to find. Still, if you stick to regular investment grade (BBB-rated and better) bonds of large corporations you can’t go too far wrong. But remember, the rating agencies are not very good at rating governments, and many highly rated governments (such as our own) have gone mad with borrowing in this recession, so it’s better to avoid government paper.

As for junk bonds or emerging market bonds, you are already in a realm where price information is hard to come by, and Wall Street brokers know far more than you do about what’s going on.

Of course, “structured products” are the broker-sold investments that you should avoid at all costs. These deals give you part of the upside on a stock portfolio, but no downside except when the market falls more than, say, 50%. These instruments are always designed to be super-profitable for the brokers, making them above-normal commissions.

You don’t have to be a fanatic believer in efficient markets (I’m not) to realize that if the commissions and profits for Wall Street are extra-large, then the deal for you as investor is extra-lousy. So tell the broker to get lost.

As retail investors, we are the least important people in Wall Street brokers’ lives. So ripping us off is highly attractive, provided it doesn’t land them in jail. Of course, if a dopey billion-dollar Libyan fund comes by, that may be easier pickings.

Be warned!

News and Related Story Links at Money Morning:

It’s Time to Bail on Bank Stocks

Rogue Trader Costs Societe Generale $7.2 Billion

Inside Wall Street: The Real Reasons the U.S. Banking System Lost its Way

The Only Way to Solve the European Sovereign Debt Crisis

How to Protect Yourself From the Collapse of Treasury Bonds

 

Related Article at GEI

The Alchemy of Securitization by John Lounsbury

Previous Post

Europe on the Brink

Next Post

Obama’s Jobs Proposal

Related Posts

Weaker Dollar Keeps Bitcoin Above $30K As Analysts Target 60% BTC Dominance
Economics

Weaker Dollar Keeps Bitcoin Above $30K As Analysts Target 60% BTC Dominance

by John Wanguba
May 20, 2022
Ethereum Developers Tip The Merge Might Happen In August ‘If All Goes As Planned’
Business

Ethereum Developers Tip The Merge Might Happen In August ‘If All Goes As Planned’

by John Wanguba
May 20, 2022
Commonwealth Bank Puts Crypto Trading Test On Ice As Regulators Hesitate
Business

Commonwealth Bank Puts Crypto Trading Test On Ice As Regulators Hesitate

by John Wanguba
May 20, 2022
Musk Hints He Could Reprice Twitter Deal As He Looks At Fake Accounts
Business

Musk Hints He Could Reprice Twitter Deal As He Looks At Fake Accounts

by John Wanguba
May 18, 2022
Madonna Joins Hands With Digital Artist “Beeple” To Launch New NFTs
Business

Madonna Joins Hands With Digital Artist “Beeple” To Launch New NFTs

by John Wanguba
May 18, 2022
Next Post

Obama's Jobs Proposal

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business Coinbase crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi digital assets Elon Musk ETH Ethereum Ethereum blockchain finance funding government investment market analysis Metaverse mining NFT NFT marketplace NFTs nonfungible tokens nonfungible tokens (NFTs) price analysis regulation Russia social media technology Tesla the US Twitter

Archives

  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • Weaker Dollar Keeps Bitcoin Above $30K As Analysts Target 60% BTC Dominance
  • Ethereum Developers Tip The Merge Might Happen In August ‘If All Goes As Planned’
  • Commonwealth Bank Puts Crypto Trading Test On Ice As Regulators Hesitate

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish