Tuesday, September 29, 2009
What a Product!
"The investment opportunity that Hao fell for was all the rage at the peak of the stock market two years ago. The marks: often Chinese entrepreneurs and state-owned enterprises. The banks selling the investment: firms including Goldman Sachs [GSG], HSBC, Citigroup and UBS. ... Here's how it worked: You commit to accumulate large blocks of shares of a Hong Kong-listed stock every day for, say, 12 months at a discount to the share price when you sign uop. You could load up on lots of a $10 stock for just $8. Easy money. The catch is that an accumulator contract terminates if the stock goes up only 5% or so, but if the stock tanks, you have to keep buying it. What were banks like [GSG] and Citigroup doing selling this product? The banks won't comment, but their standard disclosure on derivatives is that they are risky products that can win big or lose big. ... But in a commentary this spring in the Chinese business publication Ciajing, finance lawyer Mushtaq Kapasi, a former [GSFG] specialist in exotic derivatives, described how banks structured accumulators to have a big edge over the customer, like a house over the bettor in a casino. Whatever exposure they had with the accumulator client they could hedge away with other derivatives, all but locking in a profit", my emphasis, Gady Epstein at Forbes, 21 September 2009.
This is another amazing product. About the only way the retail customer could make money from accumulators is if the stock in question stayed between 80% and 105% of the original price. If I were Lloyd Blankfein, I would not travel to Hong Kong.