It is always hard to give any credence to articles that include typographic mistakes – or we could just call them typos. It is equally difficult to understand some of the structured products that are released into the market. But it is hardest of all to have any faith in an article containing coruscating assertions about structured products that has two typos in the headline.
The famed and hopefully much-loved Accountancy Ireland publication has helped us out on all counts, with a thought piece about Derivitives (sic) that asks whether the financial product that decorates this grotto of complexity is a Villian (even sicer).
We don’t ask for much, but we receive a lot when we make any mistake, and for good reason. The human condition will not allow us to accept mistakes in print – let’s leave the internet and its bulging blogosphere to one side for the sake of this argument. More than that, when you finally pluck up the courage to vent your spleen in print, then the golden rule of no typos is more important than ever.
What does Accountancy Ireland have to say about structured products? Definitely worth a look, the mistakes appear to have all been made in the headline!
Another day, and into the limelight comes yet another credit-linked note whose underlying collateral was a synthetic collateralised debt obligation. And once more, it is Singapore’s battered retail investors that are reeling following a principal writedown on Series 9 and 10 of Pinnacle Performance Notes. Expected return to investors is, you guessed it, zero.
The pain inflicted is a variation on a familiar theme, with the new debacle offering a fresh spin. Lehman Minibonds may have been included a similar first-to-default credit note as well as a CDO as underlying collateral, but the product defaulted because swap counterparty Lehman went bankrupt. And while that was happening, unfortunately little or no attention was paid to the value of the underlying collateral, but more on the risk disclosure of what would happen should the swap counterparty go bankrupt.
Pinnacle notes defaulted because entities in the CDO underlying the product experienced credit events. The reference entities that defaulted were the Federal Home Loan Mortgage Corp, Federal National Mortgage Association, Lehman Brothers, Kaupthing and Landisbanki. An impressive selection. One might be tempted to assume that a CDO containing these entities might be rated say BB or B. Not so, this CDO was in fact given a double-A rating from S&P, a level that was somehow maintained despite wildly differing levels on offer this year on these names in the CDS market.
The cold hard truth of the matter is that investors were duped by ratings that should have known better. Would the same investors have bought a product with a B rating? No. Would distributors have sold the product with the same rating? Unlikely at best.
The Pinnacle Notes default should reignite the finger pointing at the ratings agencies and deservedly so.
