There are a number of issues that need clearing up. Firstly, this blog agrees with the majority of other posts out there that products with such a risk to capital should have been sold to retirees only under the strictest of circumstances. Selling any type of investment, where the risk of capital loss is high, to a pensioner is immoral and laughable. However many distributors have, admirably, decided to implement a compensation programme for vulnerable investors, although the definition of a vulnerable investor is a bit too exclusive (The definition in Singapore: if an investor was over 62 years of age at the time of purchasing the product and only has a primary school education). The compensation scheme is an admission of guilt and the regulators have done well to assuage institutions in admitting fault and rectifying the situation.

Secondly, if distributors, as is claimed by some investors, sold products under the pretence that the investments were similar to deposits there is no doubt of misselling and appropriate action should be taken. But here is where the ultimate problem lies. Investors should have read the full prospectus of the products, where every risk is explicitly stated. In every Minibond prospectus there is an explanation of what would happen to the product should the swap counterparty, Lehman, go bankrupt. Anything short of a comprehensive read is wilful ignorance on the investors’ part. Yes some investors were duped and may not have been given the product prospectus, but the majority of investors should have known better. Unless of course investors were banking on the Fed saving Lehman, then the blame should settle firmly with US Treasury Secretary Hank Paulson.

Thirdly, investors have most cause to complain over the fact that many Minibond issues used supposedly triple-A rated CDOs as underlying collateral. In the next few weeks the value of these collateral tranches will be revealed and it has to be said that market participants are not expecting high percentages. Investors cannot be blamed for buying a product with triple-rated collateral. But who is to blame? The ratings agencies of course. Even if Lehman had not gone bankrupt some of the Minibond products would have redeemed well below 100%. It is likely investors will soon take aim at the rating crew.

As market participants well know, genuine crisis was something which actually lay a few months down the line. “The last time a retail structured product broke the barrier was with the precipice bond scandal in the bear market of 2001-03, which resulted in a number of financial advisers going out of business,” the article woefully reminisces.

‘Scandal’ is rather a strong word to be used in the context of this product. The stock basket (which also includes HSBC, RBS, Barclays and Lloyds TSB) still has five years to recover, which means that unless we are facing the ultimate decimation of the banking system (in which case we have slightly bigger problems to worry about), investors can not only receive back principal but a leveraged return on their capital too. The product is performing exactly as outlined – investors took a view that the banking sector would recover, it hasn’t (yet) and that is the risk of their investment, which BSAM will have been under Mifid-obligated pains to disclose when investors signed up. It’s unlikely in the extreme that articles will now be written tutting over the fact shareholders in HBOS are going to lose money, but they bought that stock on the same premise that someone would buy a structured product linked to the shares. Unlike precipice bonds, these structured products are not leveraged on the downside, which is what made the 2001-03 so painful for most holders.

The real story here, which receives a cursory nod in the article’s closing paragraphs, is counterparty risk. Investors in Lehman-issued structured products are the ones who will be most shocked by the impact on their investments of the past month’s events. They face a very real and immediate threat of not getting their capital back, a risk which may well have not been given the attention it deserved when investors handed their money over. Someone losing money as a result of their investment, unless the product has been missold, is an unfortunate but wholly expected, and accepted consequence of speculation, whichever means you use.