As if structured products weren’t suffering enough bad press already this week, a story appeared in the Financial Times this morning firing another bullet at our embattled quarry. The article, ‘Clouds gathering around Blue Sky structured product’ alerts readers that a product launched by Blue Sky Asset Management (BSAM), The Accelerated Recovery Plan, which is linked to five UK banking stocks, is close to breaching its 50% soft protection barrier following the plummet taken by HBOS equity. The plan was launched in April, with BSAM trumpeting that the “RBS rights issue and central bank action signal beginning of the end for bank crisis”.
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.
