Wall Street's Latest Retail Fleecing Product Exposed – Structured CDs
ZeroHedge.com Sep 8, 2016 8:15 AM Submitted by Mike Krieger via Liberty Blitzkrieg blog, Ms. Bailey, the Citizens Bank customer in Massachusetts, had sold a condo in Maine in 2013, a year after the death of her husband, who she says had handled their finances. She went to a Citizens branch in Arlington, a suburb of Boston, to deposit the money. She says bank employees pressured her not to just park the money in a savings account. She says she was directed to Citizens broker Andrew Jurkunas, who steered her to a CD called the GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit Due 2021. It is one of a series of CDs based on a Goldman Sachs-designed index that tracks the performance of up to 14 exchange-traded funds and a cash-like holding. The index aggregates the performance of different combinations of some or all of the underlying funds, relying on a complex formula designed to smooth volatility. When Ms. Bailey received her first statement showing that the value of her CD had dropped by more than $4,000, she complained to Massachusetts state securities regulators. This January, the office filed civil charges against the bank alleging that Mr. Jurkunas, who wasn’t named or accused of wrongdoing, didn’t adequately disclose the risks of the market-linked CD. – From yesterday’s excellent Wall Street Journal article: Wall Street Re-Engineers the CD—and Returns Suffer Wall Street is an industry that should have been allowed to go down in flames back in 2008. Bailing out these career criminals and sociopaths was one of the gravest errors in American history. An error that we as a nation continue to suffer from to this day. As an example, yesterday’s Wall Street Journal reported on the industry’s latest scheme to pocket the hard earned savings of those dwindling Americans who still have a few pennies left — structured CDs. What follows are some key excerpts from this must read article, Wall Street Re-Engineers the CD—and Returns Suffer: Mary Bailey, a 79-year-old widow in Arlington, Mass., made a big deposit for her grandchildren at her Citizens Bank branch when a financial adviser there sold her on a newfangled $100,000 certificate of deposit. It would, he said, double her savings in six years, according to a later state enforcement action. So she was irate when her first statement showed the CD’s value had fallen to $95,712, thanks to upfront fees. “This was not a CD as I know a CD,” Ms. Bailey says. Traditional certificates of deposit offer better interest rates than normal savings accounts for customers who agree to lock up funds for a period of time. Since the 1960s, they have been among the most popular products retail banks offer. Now Wall Street has re-engineered the most bread-and-butter of investments in a way that leaves many investors with lower returns, and facing losses if they have to cash out early. Returns on such CDs, known as market-linked or structured CDs, depend on the performance of a basket of stocks or other assets instead of a flat interest rate. CD holders get their original money back when the CD matures, usually after three to 10 years, plus a return based on the performance of certain assets or benchmarks. Sounds good, but as always, the devil is in the details. Most issuers of such CDs don’t publicly disclose any performance data, so it is difficult for would-be investors to assess how good a deal the products are. The Wall Street Journal obtained from an investment adviser returns data on hundreds of market-linked CDs created by Barclays PLC, a leading player. The data show that many underperformed conventional CDs, in part because their design puts a limit on the upside from gains in the underlying assets. Of the 325 Barclays CDs reviewed by the Journal, 239 had announced at least one annual return payment. More than half of those returns were lower than an investor would have earned from an average five-year conventional CD. Of the 118 structured CDs that were issued at least three years ago, only one-quarter posted returns better than those of an average five-year conventional CD. And roughly one-quarter produced no returns at all as of June 2016. A Journal analysis of 147 market-linked CDs issued since 2010 by Bank of the West, part of French bank BNP Paribas SA, revealed a similar pattern. Sixty-two percent produced returns lower than an investor would have received from a five-year conventional CD, while almost a quarter have yet to pay any return at all, the analysis found. A Barclays spokesman said in a written statement the structured CDs market has “seen significant evolution over the last few years to meet the needs of clients, investors and distributors seeking to navigate the continued challenges of a low interest rate environment.”The unusual CDs have been around in some form since the 1980s, but sales have taken off since the financial crisis. That is partly because, at a time of rock-bottom interest rates, investors have been desperate to find anything that appears it might generate higher yields. Banks, for their part, are looking for inexpensive sources of funding. In addition, such CDs generate fees. Fee income, in particular, has been hard hit, leaving banks looking for new products yielding more than conventional savings accounts and CDs. Market-linked CDs don’t have to be registered with the Securities and Exchange Commission, so there are no official sales data. Bankers and other experts on the product estimate sales of $5 billion to $15 billion a year. U.S. investors held about $22.7 billion of market-linked CDs last month, up 36% from 2012, according to StructuredRetailProducts.com. I suppose it doesn’t matter how many times the public gets scammed by Wall Street, they keep coming back for more. In this particular case, this is partly due to the fact that these products are created by the TBTF banks, but then marketed at the retail level by local bank branches. The CDs are sold to customers of regional banks and brokerages by bankers and brokers, who receive commissions. Brokers say each month they receive lists of new market-linked CDs created by Wall Street firms, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Barclays and others. Typically, everyone in the sales chain—a wholesale broker, a financial adviser and a bank teller—gets paid more for selling a market-linked CD than a conventional CD or a mutual fund. The adviser who actually sells the CD, for example, can get commissions of up to 3% of the CD’s value, according to information sent to brokers reviewed by the Journal. “Banks have to be delighted with these structured products,” said Steve Swidler, a finance professor at Auburn University. “There’s virtually no risk to them, and [the banks] sit back and rake in fees.” The Barclays CDs reviewed by the Journal generally are linked to underlying “baskets” of five, 10 or 20 stocks. Most pay income based on an “adjusted” version of the basket’s actual return, calculated by applying a cap and floor to each stock’s performance. Now here’s how the sausage is made… Suppose a basket of 10 stocks has a cap of 5% and a floor of 20%. If eight of the stocks go up 20% and two go down 20%, the average actual performance would be 12%. But because each increase is capped at 5%, while up to 20% of each decrease is counted, the adjusted average performance is zero—a much worse return for the customer. For the 247 Barclays CDs analyzed by the Journal that used this method, the adjusted overall stock performance tended to be worse—on average, 28 percentage points lower—than the actual performance of the underlying stocks. Investors in the CDs also forfeit the dividends they would have received by owning the stocks outright. One Barclays six-year CD due to mature in October is based on 20 stocks. The shares’ average values had more than doubled as of June. But the CD was designed to cap positive returns at 6% and negative returns at 30%. That translated into an adjusted performance of negative 4% for the whole basket. As a result, four of the annual coupons the CD has paid were zero. A fifth was 0.04%. That means a $100,000 deposit would have generated a $40 return over five years. A conventional five-year CD, by contrast, would have generated an average of $8,100 in interest, according to Bankrate.com. Other structured CDs from Barclays and other issuers fared better, including some that track a stock index. “I’ve worked in the kitchen and seen how it’s made, so I’m not interested in consuming them,” says Keith Amburgey, who used to design market-linked CDs at Morgan Stanley and now runs Tampa-based financial advisory firm Rutherford Asset Planning. Morgan Stanley declined to comment. One series of CDs from HSBC Holdings PLC is called “Industry Titans” because the instruments are pegged to brand-name stocks. The 10 stocks underpinning a 2012 version of the CD, including Tiffany & Co. and ConAgra Foods Inc., were up by 46%, on average, at the end of July, according to FactSet. But a 6% cap on positive returns and a 30% floor on negative ones reduced the CD’s adjusted performance, which determines the amount paid to the investor, to negative 1.1%. The CD paid a zero return in July, for the fourth year in a row, according to HSBC. In 2013, a broker at Fifth Third Securities Inc. advised an 88-year-old customer to put about $200,000 from his retirement account, nearly 80% of the total, into market-linked CDs, according to the customer’s lawyer, Howard Rosenfield of Farmington, Conn. The investor had to sell the CDs early, in part to make the minimum withdrawals required under retirement-account rules—a cash need that was foreseeable at the time Fifth Third sold him the CDs, Mr. Rosenfield says. His client lost more than $20,000 on the sales. Ms. Bailey, the Citizens Bank customer in Massachusetts, had sold a condo in Maine in 2013, a year after the death of her husband, who she says had handled their finances. She went to a Citizens branch in Arlington, a suburb of Boston, to deposit the money. She says bank employees pressured her not to just park the money in a savings account. She says she was directed to Citizens broker Andrew Jurkunas, who steered her to a CD called the GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit Due 2021. It is one of a series of CDs based on a Goldman Sachs-designed index that tracks the performance of up to 14 exchange-traded funds and a cash-like holding. The index aggregates the performance of different combinations of some or all of the underlying funds, relying on a complex formula designed to smooth volatility. A spokeswoman for Goldman, which hasn’t been accused of any wrongdoing in relation to the case, said the bank was “not a party in the customer’s complaint or settlement, and had no direct relationship with the investor” and that the product’s risks were “clearly explained” in its documents. Indeed, here’s how the Vampire Squid “clearly explained” the product… Documents related to the CD, including a description of the methodology behind the Goldman index, run to 266 pages and feature calculus, hypothetical backtested data and flowcharts. Ms. Bailey says she didn’t read the documents. When Ms. Bailey received her first statement showing that the value of her CD had dropped by more than $4,000, she complained to Massachusetts state securities regulators. This January, the office filed civil charges against the bank alleging that Mr. Jurkunas, who wasn’t named or accused of wrongdoing, didn’t adequately disclose the risks of the market-linked CD. At this point, Wall Street is essentially a purely parasitic industry. It adds virtually nothing of value to the U.S. economy or society, it just constantly rips off the public and redistributes wealth to itself. Still don’t believe me? Chew on the following excerpts from an article published yesterday at Naked Capitalism, Does Wall Street Do “God’s Work”? Or Even Anything Useful? In the wake of the 2008 crisis, Goldman Sachs CEO Lloyd Blankfein famously told a reporter that bankers are “doing God’s work.” This is, of course, an important part of the Wall Street mantra: it’s standard operating procedure for bank executives to frequently and loudly proclaim that Wall Street is vital to the nation’s economy and performs socially valuable services by raising capital, providing liquidity to investors, and ensuring that securities are priced accurately so that money flows to where it will be most productive. The mantra is essential, because it allows (non-psychopathic) bankers to look at themselves in the mirror each day, as well as helping them fend off serious attempts at government regulation. It also allows them to claim that they deserve to make outrageous amounts of money. According to the Statistical Abstract of the United States, in 2007 and 2008 employees in the finance industry earned a total of more than $500 billion annually—that’s a whopping half-trillion dollar payroll (Table 1168). There’s just one problem: the Wall Street mantra isn’t true. Let’s start with the notion that Wall Street helps companies raise capital. If we look at the numbers, it’s obvious that raising capital for companies is only a sideline for most banks, and a minor one at that. Corporations raise capital in the so-called “primary” markets where they sell newly-issued stocks and bonds to investors. However, the vast majority of bankers’ time and effort is devoted to (and most bank profits come from) dealing, trading, and advising investors in the so-called “secondary” market where investors buy and sell existing securities with each other. In 2009, for example, less than 10 percent of the securities industry’s profits came from underwriting new stocks and bonds; the majority came instead from trading commissions and trading profits (Table 1219). This figure reflects the imbalance between the primary issuing market (which is relatively small) and the secondary trading market (which is enormous). In 2010, corporations issued only $131 billion in new stock (Table 1202). That same year, the World Bank reports, more than $15 trillion in stocks were traded in the U.S. secondary market– more than the nation’s GDP. Yet secondary market trading is fundamentally a zero sum game—if I make money by buying low and selling high, it’s money you lost by buying high and selling low. So, what benefit does society get from all this secondary market trading, besides very rich and self-satisfied bankers like Blankfein? The bankers would tell you that we get “liquidity”–the ability for investors to sell their investments relatively quickly. The problem with this line of argument is that Wall Street is providing far more liquidity (at a hefty price—remember that half-trillion-dollar payroll) than investors really need. Most of the money invested in stocks, bonds, and other securities comes from individuals who are saving for retirement, either by investing directly or through pension and mutual funds. These long-term investors don’t really need much liquidity, and they certainly don’t need a market where 185 percent of shoes are bought and sold every year. They could get by with much less trading—and in fact, they did get by, quite happily. In 1976, when the transactions costs associated with buying and selling securities were much higher, fewer than 20 percent of equity shares changed hands every year. Yet no one was complaining in 1976 about any supposed lack of liquidity. Today we have nearly 10 times more trading, without any apparent benefit for anyone (other than Wall Street bankers and traders) from all that “liquidity.” So, what does Wall Street do that benefits society? Doctors and nurses make patients healthier. Firefighters and EMTs save lives. Telecommunications companies and smart phone manufacturers permit people to communicate with each other at a distance. Automobile executives and airline pilots help people close that distance. Teachers and professors help students learn. Wall Street bankers help—mostly just themselves.
0 Comments
The One Trillion Dollar Consumer Auto Loan Bubble Is Beginning To Burst
ZeroHedge.com Sep 7, 2016 8:30 PM Submitted by Michael Snyder via The Economic Collapse blog, Do you remember the subprime mortgage meltdown from the last financial crisis? Well, this time around we are facing a subprime auto loan meltdown. In recent years, auto lenders have become more and more aggressive, and they have been increasingly willing to lend money to people that should not be borrowing money to buy a new vehicle under any circumstances. Just like with subprime mortgages, this strategy seemed to pay off at first, but now economic reality is beginning to be felt in a major way. Delinquency rates are up by double digit percentages, and major auto lenders are bracing for hundreds of millions of dollars of losses. We are a nation that is absolutely drowning in debt, and we are most definitely going to reap what we have sown. The size of this market is larger than you may imagine. Earlier this year, the auto loan bubble surpassed the one trillion dollar mark for the first time ever… Americans are borrowing more than ever for new and used vehicles, and 30- and 60-day delinquency rates rose in the second quarter, according to the automotive arm of one of the nation’s largest credit bureaus. The total balance of all outstanding auto loans reached $1.027 trillion between April 1 and June 30, the second consecutive quarter that it surpassed the $1-trillion mark, reports Experian Automotive. The average size of an auto loan is also at a record high. At $29,880, it is now just a shade under $30,000. In order to try to help people afford the payments, auto lenders are now stretching loans out for six or even seven years. At this point it is almost like getting a mortgage. But even with those stretched out loans, the average monthly auto loan payment is now up to a record 499 dollars. That is the average loan size. To me, this is absolutely infuriating, because only a very small percentage of wealthy Americans are able to afford a $499 monthly payment on a single vehicle. Many middle class American families are only bringing in three or four thousand dollars a month (before taxes). How in the world do they think that they can afford a five hundred dollar monthly auto loan payment on just one vehicle? Just like with subprime mortgages, people are being taken advantage of severely, and the end result is going to be catastrophic for the U.S. financial system. Already, auto loan delinquencies are rising to very frightening levels. In July, 60 day subprime loan delinquencies were up 13 percent on a month-over-month basis and were up 17 percent compared to the same month last year. Prime delinquencies were up 12 percent on a month-over-month basis and were up 21 percent compared to the same month last year. We have a huge crisis on our hands, and major auto lenders are setting aside massive amounts of cash in order to try to cover these losses. The following comes from USA Today… In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015. General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier. Meanwhile, other big corporations are also alarmed about the economic health of average U.S. consumers. Just check out what Dollar General CEO Todd Vasos had to say about this just the other day… I know that when we look at globally the overall U.S. population, it seems like things are getting better. But when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that’s out there, that demographic, things have not gotten any better for her, and arguably, they’re worse. And they’re worse, because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip. The stock market may seem to be saying that everything is fine (for the moment), but the hard economic numbers are telling a completely different story. What we are experiencing right now looks so similar to 2008, and this includes big institutions just dropping dead seemingly out of the blue. On Tuesday, we learned that ITT Technical Institute is immediately shutting down and permanently closing all locations. This is from a Los Angeles Times report… The company that operates the for-profit chain, one of the country’s largest, announced that it was permanently closing all its campuses nationwide. It blamed the shutdown on the recent move by the U.S. Education Department to ban ITT from enrolling new students who use federal financial aid. “Two quarters ago there were rumors about the school having problems, but they told us that anyone who was already a student would be allowed to finish,” said Wiggins, who works as the assistant manager for a family-run auto parts business and went to ITT to open new opportunities. “Am I angry?” he said. “I’m like angry times 10 million.” As a result of this shutdown, 35,000 students are suddenly left out in the cold and approximately 8,000 employees have lost their jobs. This is what happens during a major economic downturn. Large institutions that may have been struggling under the surface for quite a while suddenly give up and drop a bomb on those that were depending on them. In the months ahead, there will be a lot more examples of this. Already, some of the biggest corporate names in America have been laying off thousands of workers in 2016. Mass layoffs are usually an early warning sign that big trouble is ahead, so keep a close eye on those companies. The pace of the economic decline has been a bit slower than many (including myself) originally anticipated, but without a doubt it has continued. And it is undeniable that the stage is set for a crisis that will absolutely dwarf 2008. Our national debt has nearly doubled since the beginning of the last crisis, corporate debt has doubled, student loan debt has crossed the trillion dollar mark, auto loan debt has crossed the trillion dollar mark, and total household debt has crossed the 12 trillion dollar mark. We are living in the greatest debt bubble in world history, and there are signs that this giant bubble is now starting to burst. And when it does, the pain is going to be greater than most people would dare to imagine. Barron's: Federal Deficit Is Set 'to Explode'
By Frank McGuire | Monday, 05 Sep 2016 03:34 PM newsmax.com Be warned: The steady stream of federal red ink is getting to be a deeper shade of crimson. As increases in annual U.S. budget gap add to national debt, blunt prospects for economic growth, and bode badly for America’s financial future, Barron’s reports. The Congressional Budget Office (CBO) recently revised its projections for the U.S. budget in a report that began with an alert that, in fiscal year 2016, the budget deficit will grow, relative to the economy, for the first time since 2009. In dollar terms, that’s about a $590 billion annual gap, $152 billion wider than last year’s. “If current laws generally remained unchanged—an assumption underlying CBO’s baseline projections—deficits would continue to mount over the next 10 years, and debt held by the public would rise from its already high level,” the CBO reported. “In short, the federal budget deficit is about to explode,” David Ader, a government-bond strategist at Greenwich Capital, RBS, and most recently, CRT, wrote for Barron’s. The agency projected that the debt held by the public will rise 3 percentage points to 77 percent of U.S. gross domestic product by the end of fiscal year 2016 this month, the Washington Examiner reported. Debt has not hit that ratio since 1950, when the government was still in the middle of paying down the debt it incurred paying for World War II, the Examiner reported. By 2026, the office sees the debt rising from 77 percent of GDP to 86 percent. And it is poised to continue climbing as interest costs on the debt mount, along with payments for Social Security, Medicare, and other programs. A budget deficit is the difference between what the federal government spends (called outlays) and what it takes in (called revenue or receipts). The national debt, also known as the public debt, is the result of the federal government borrowing money to cover years and years of budget deficits. “This is a problem. It’s obvious that debts eventually must be paid. We can fret over how that will be accomplished, given the new normal of subdued economic growth (real GDP expansion averaged 3.2% from 1970 to 2000, 1.8% from 2000 to 2016, and 1.4% since 2006) and an aging population that expects to be supported in its grossly underfunded retirement,” Ader explained. “That isn’t the only concern and may not be the biggest. The problem is that government debt is simply bad for growth,” Ader wrote. “As the CBO study shows, seven years after the trough of the recession, the U.S. is about to see a sharp and lengthy widening of its deficit. That means more Treasury issuance competing with private-sector borrowing, and more uncertainty about how the debt will be paid, probably with higher taxes and/or reduced entitlements,” Ader said. “What doesn’t seem likely or sustainable is an increase in the kind of federal spending that brings more growth. Thus, we can expect more middling GDP figures and easier-than-anticipated monetary policy. Even if the Fed hikes short-term rates, longer Treasury yields could fall.” To be sure, some of the highest-profile invest experts have expressed concern over such a scenario. Jeffrey Gundlach, who oversees more than $100 billion at DoubleLine Capital, warned of a “mass psychosis” among investors piling into debt securities with ultra-low yields. Bill Gross of Janus Capital Group Inc. compared the sky-high prices in the global bond market to a “supernova that will explode one day,” |
Archives
December 2020
Categories |