Certificates and derivatives: Investors’ contribution to losses in the subprime crisis

Renowned credit institutions sold “guarantee” certificates and similar constructs, for example those of Lehman Brothers Bank, to gullible bank customers as safe investments:

Bank and savings bank advisors are thus today often liable for the reversal.

The advisors regularly did not read the certificate conditions or sales brochures, which can be up to 200 pages long. Thus, they could not point out any risks to the bank customers – but a plethora of traps await the numerous investors. Credit institutions, as with other subprime securities, have consistently relied on positive “ratings” that later proved 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. 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.

Investors then wait months for their money because the issuer cannot even estimate the value in order 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?


No investor gets to see a comprehensible calculation of his quota

The price of the securities is regularly complicated to determine because numerous data are included – such as the share price, the expected dividend or price fluctuations and the interest rate. Annually, it apparently happens over a thousand times that no quota can be “put”.

No investor gets to see a comprehensible calculation of his quota. nyone who has read the terms and conditions of the certificates or derivatives will notice time and again that not all the risks have been explained in a comprehensible manner.

Above all, in the vast majority of cases the issuers cannot even ensure that the securities can be traded at all times – the banks call this “technical problems”. predominantly guarantee and partial protection products are sold to the investor.

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 secure bonds with a risk-free interest rate. It is difficult to make price forecasts, and some investors suffer losses in order 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, it is always for the bank or the issuer.


The costs of such certificates are not transparent for almost any client or advisor.

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 playing roulette or a total loss.

Another variant are bonus certificates, where the price of a share or an index must remain within a certain range – if this is not the case, the investor loses the right to the previously promised fixed return and there is a risk of serious losses.

Investors may lose their entire stake if they buy a life insurance policy that invests clients’ money in certificates. This variant resembles an investor who spends his money for retirement provision weekly on lottery tickets – because this lottery could go well.

For virtually no investor or advisor, the costs are 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 account fees, issue surcharges or sales commissions and the hope of price gains – usually while foregoing the dividends.

In addition, some credit institutions and asset managers have placed such securities in their investors’ custody accounts even without a suitable customer order.

Such securities are also often sold as “absolute return” products, which were offered to investors as a real alternative to money market investments – only with more interest.

The catch was considerable and difficult-to-understand value losses later on – these capital loss risks of 25 percent and more were often concealed from conservative investors.

And finally, the expert speaks of the issuer risk, because certificates and derivatives are in danger of total default – as happened, for example, with Lehman Brothers securities.

But also with numerous other renowned issuers of certificates a detailed analysis leads to the result of high risks due to deficient creditworthiness. The advertising slogan about “guarantees and one hundred 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


by courtesy of

www.kaden-verlag.de (published in Chirurgische Allgemeine, issue 9/2008, pages 388-389)

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.

About the author

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.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.

Arrange your personal appointment with us.

Make an appointment / call back service

You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.

Obtain a second legal opinion

The first telephone call about your request is free of charge.