Bank liability or systematic investor damage?

“Trap salesmen” in credit institutions cause total losses with marketing slogans


Renowned credit institutions sold “guarantee” certificates and similar constructs, for example those of the Lehman Brothers Bank, to gullible bank customers as a safe investment: bank and savings bank advisors are thus often liable for reversals today.


Consultant Incompetence Trap

The consultants regularly did not read the certificate conditions or sales brochures, which can be up to 200 pages long. So they could also not point out any risks to bank customers – but a plethora of traps await the numerous investors.
Rating trap Credit institutions, as with other subprime securities, have always relied on positive “ratings” that turned out to be flawed. It is therefore not surprising that savings banks and banks were still selling Lehman securities until a few days before the collapse.


Market Disruption Trap

It happens again and again that a bank gives notice to investors but cannot or does not want to determine the NAV (net asset value) of the investments exactly. So investors then wait months for their money because the issuer can’t even estimate the value to be able to announce the price data (quotas). If, exceptionally, an investor realizes a profit on exit, then according to some stock exchange regulations the transaction can still be cancelled by the bank two days later – a system to protect credit institutions from customer profits?


Quota trap

The price of the securities is regularly complicated to determine because numerous data are taken into account, for example share price, expected dividend or price fluctuation, interest rate. Annually, it apparently happens more than a thousand times that no quota can be “put”. No investor gets to see a comprehensible calculation of his quota.
Prospectus trap Anyone who has read the terms and conditions of the certificates or derivatives will repeatedly find that not all the risks have been explained in a comprehensible way. Above all, in the vast majority of cases the issuers cannot even ensure that the securities can be traded at all times – the banks then call this “technical problems”.
Yield trap Guarantee and partial protection products are predominantly sold to investors. At the same time, many investors and their advisors overlook the fact that guarantees also have their price – due to the compound interest effect, it then often seems cheaper to buy safe bonds with a risk-free interest rate.


Risk trap

It is difficult to make price forecasts, and some investors suffer losses, only to buy up afterwards – in the hope of improvement, “overconfidence” as the market psychologist calls it. The investor can by no means be sure of a fair price when the securities are returned – if things go well, then always for the bank or the issuer.
Conditional trap Long and short certificates are pure speculation with built-in leverage – if the stock market price moves in the “wrong” direction, the result is like a game of roulette or a total loss. Another variant are bonus certificates, where the price of a share or index must remain within a certain range – if this is not the case, a practical rule, the investor loses the claim to the previously firmly promised return and the investor is threatened with substantial losses.
Insurance Trap Investors also have the chance to lose their entire stake by buying a life insurance policy that invests clients’ money in certificates. This seems similar to an investor who spends his money for his old-age provision on lottery tickets every week – because this lottery could also work out well.


Cost trap

For virtually no investor or advisor are the costs transparent, such as management and trading commissions, hidden costs. This also includes the “spread”, i.e. the difference between the buying and selling price. In addition, there are management costs, custody fees, issue surcharges or sales commissions, and the hope of price gains – usually while foregoing the dividends.


Deposit trap

Apart from that, some credit institutions and asset managers have placed such securities in their investors’ custody accounts even without a suitable customer order.
Security trap Such securities are also often sold as “absolute return” products, which are offered to investors as a real alternative to money market investments – only with more interest. The catch was later substantial and difficult-to-understand losses in value – conservative investors were often kept in the dark about these capital loss risks of 25 percent and more.


Creditworthiness trap

And finally, the expert speaks of the issuer risk, because certificates and derivatives are threatened with total default – as happened, for example, with Lehman Brothers securities. But also with numerous other renowned issuers/issuers of certificates, a precise analysis leads to the result of high risks due to deficient creditworthiness. The advertising slogan about “guarantees and 100 percent capital protection” from the brochures falls short, because the many half-educated bank advisors themselves often do not know what they are dealing with. In practice, these certificate investors contributed to the subprime crisis: they relied on “trap sellers” with marketing slogans and reaped total losses for it.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

courtesy of

from (Published in Die Zahnarztwoche, issue 11/2009)


Confectionery production, issue no. 19, 10/2008, page 6


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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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