Friday, August 7, 2009

Banks Don't Go Back to Basics

When Wall Street imploded in September 2008, many called for a return to basics in finance. BusinessWeek reported many banks are doubling down, offering predatory payday loans to risky borrowers and packaging financial chainsaws (credit derivatives) with corporate credit lines. Also, they're selling structured notes to small investors. What are they? Investopedia says:

Structured notes are a debt obligation that also contains an embedded derivative component with characteristics that adjust the security's risk/return profile. The return performance of a structured note will track that of the underlying debt obligation and derivative embedded within it.
Another definition:

Structured notes are financial products that appear to be fixed income instruments, but contain embedded options and do not necessarily reflect the risk of the issuing credit. These options may be "plain vanilla" or they may be highly leveraged exotic options. Due to the fact that each one is unique, the risks inherent in any one structured note may not be obvious.
Payday loans, derivatives for small investors, forced credit default swaps for corporate credit lines? Banks are back to Wall Street basics, greed.