Managing the human greed

It has only been a mere 3 months since my last blog … but what a 3 months that is …. Within this 3 months, none of the investments banks in US are left standing.  Who would have thought big investments banks like Leman Brothers, Morgan Standley, Merrill Lynch, etc would file for bankruptcy or needed white knights to inject cash.   And Who would have thought AIG need cash so badly that it had to be bail out by the US government.  But… fall they did, one by one … like a stack of dominoes.

Back in Singapore, the fall of these US banks spelled trouble for the local investors as well. The bone of contention lies with structured products (that are backed by Leman Brothers) sold by local banks.  The structured products are super complex, involving swaps and options and what-not, piled upon the primary assets layers after layers like sugar icing on a cream cake.  Nice to see, sweet to the taste, but if anything goes wrong, leaves you with a terrible migraine and excruciating heartache as what is felt my many people now.

As one would expect …. people are now out braying for blood. ” I have been mis-sold the product, cheated. Life savings gone!” they all cried in unison. Looking at the complexity of the structured products, it is not difficult to empathize with these people. Even a professor might take several hours or days to fully comprehend the complexity behind the product or to figure out what the actual underlying asset is.  While my heart goes out to all the people who had invested and stand ready to lose their investements, I cannnot help but feel something is terribly wrong.  While I try to pin point the problem, lets try to answer some simple questions:

1. Is there a chance that people are being mislead to purchase the products?

I would say … probably there is.  Looking at the complexity of the product being sold, it would take a huge effort by the relationship managers to try and explain the product to the investors.

2.  Are all the affected investors victims of mis selling?

I think not. in fact, to be more realistic, probably only a handful of them are. The rest I felt are more victims of their own greed and that is where the entire problem lies.

And why do I say so?  Let me try to explain.

I believe at least 90% of the people would know the concept behind “Putting all your eggs in one basket”.  If not for greed, why would someone, who is retiring, decided to put all their life savings into a product that they cannot even understand? This simply flies in the face of being rational and logical.

The money belongs to the investors. Ultimately, the relationship managers did not resort to using force or fraud to force investors in parting with their money.  I am quite sure that if Lehman did not fail and these investors got their expected gains, none of these allegations of mis-selling would have surfaced.

Even without considering the above points, I am sure all of us knows the phase “if it is too good to be true, there much be a catch some where” or “there is no free lunch”.  If the investors can take a step back and think about the question “Why is this product that I am investing in has the potential to generate so much higher return as compared to a normal fixed / time deposit?” or even stop and ponder “DO I truly understand what I am investing in?” I am sure the tragedy that is playing itself out now would not have occurred.  Some how I have a nagging feeling that such questions had flashed across their mind at one point of another, but was summarily brushed and swept aside into the deepest recess of their mind by their own greed.  Because after all, they are investing their life savings… something which they cannot afford to lose, i.e. the money that is going to sustain them for their retirement.

Lets wind back the clock to maybe a year back …  economy is doing well, equity prices are rising, interest rates are all time low. Even if the RMs had dutifully explain the derivatives that are embedded within the structured products to the investors and carefully pointed out that there is a chanse that banks backing the assets of the products would fail and the the investors might not get their capital back.  I can bet my last penny that with an anticiapted return of 7 to 8% per annum, there would still be people buying into the product, dispite not knowing a tenth of what the product is all about.