Skip to comments.Derivative CDs Tempt Savers as Banks Reap Fees
Posted on 02/16/2012 9:05:52 PM PST by Razzz42
A gray-haired woman picking a flower with a young girl adorns the cover of an HSBC Holdings Plc (HSBA) brochure that promises investors both the growth of the market and the security of FDIC Insurance.
By tying interest rates to everything from the Dow Jones Industrial Average to precious metals, the pamphlet for HSBCs Market-Linked Certificates of Deposits explains U.S. investors have the potential to earn enhanced returns over as long as seven years. A separate disclosure states that they also may earn zero, getting just their original principal back after the CD matures, while brokers may collect fees of 6 percent or more. Investors that need to get their money earlier must find a buyer for the CD, risking a loss.
As the Federal Reserve holds interest rates at about zero for a fourth year, Goldman Sachs Group Inc. (GS), Citigroup Inc. and the rest of Wall Street are selling record numbers of the CDs to savers seeking the chance to earn eight times what fixed-rate deposits pay, while having principal backed by the Federal Deposit Insurance Corp. Officials at the Financial Industry Regulatory Authority, or Finra, said theyre examining whether buyers understand the risks of CDs that may lock up money in derivatives bets for as long as 20 years.
They are hugely profitable for the issuers, much more profitable than typical CDs, and they are poorly understood by retail investors, who will not be able to figure out how much profit the issuers are making, said Frank Partnoy, a University of San Diego law professor and formerMorgan Stanley (MS) derivatives trader. The institutions that are selling them might as well be marketing CDs whose value depends on which team wins the Super Bowl.
(Excerpt) Read more at jsmineset.com ...
Derivatives got us into this mess.
You’d have to be crazy to buy into these CD’s.
I cant believe the SEC allows them.
Shoving it all into high growth stocks since June would have yielded 20% plus. Of course jump out on traditional jumping in days. (Apr 15)
You can still get 4 & 5 percent state issued general obligation municipal bonds on the secondary market with little to no risk. If you live in the state of purchase they are state & federal double tax free. Stay away from this junk !
Bankers need the money to maintain their lifestyles or they will have nothing left after bribing...er...I mean, lobbying Congress.
I believe it has been obvious for some time that the SEC (and all other government agencies for that matter) serve the banksters, and not us.