August 28, 2010
Marketing of Principal-Protected Notes
What UBS did in the US, Credit Suisse practiced in Switzerland. It is estimated that Credit Suisse sold principal-protected Lehman notes worth about 700 million Swiss Francs in Switzerland alone. The clients were mostly small investors with little or no experience in capital markets. Just as UBS, Credit Suisse failed to inform the customers about the true nature of these products.
Just look at a "factsheet" of a Lehman note sold be Credit Suisse. In the section entitled risks you will find neither Lehman nor creditworthiness of the issuer nor anything similar. Instead – throughout the whole document - you will encounter five times the promise principal-protected – but not a single time in conjunction with Lehman, at least not explicitly.
What in my view proves the accusation of deception is the fact that in a sales brochure issued by Credit Suisse, these opportunity notes carry the risk label low (page 15 of the brochure entitled "Anlegen und Vorsorgen"), whereas in the small print disclaimer of such a note, there is talk of high risks. It is obvious that one text was written by marketing people and the other by legal staff and that Credit Suisse failed to reconcile the two.
The version the relationship managers stuck to is of course the first one, as you could see from an e-mail sent by my relationship manager. He recommends the Lehman note as an alternative to a fixed deposit and claims that it is FULLY principal-protected (capital letters by Credit Suisse). No mention of Lehman, issuer or issuer risk.
In the mean-time, Credit Suisse was forced to buy back about 150 million Swiss Francs worth of these notes – not by our financial market supervisory authority FINMA, which is totally useless, but by public pressure. (I also received a 50% offer after deducting the lawyer's fees, it was more of a 43% offer). In total, this is of course barely more than 20% of what Credit Suisse had sold.
At the end of February 2010, Credit Suisse was still advertising structured products on its website with the slogan "Protect your portfolio against unexpected risks with structured derivatives". The Opportunity Note that was then presented featured repeated emphasis on one-hundred-percent capital protection without a single mention of issuer risk. The Opportunity Note was then awarded a lovely low risk value. However, one look at the fine-print disclaimer of such an Opportunity Note would immediately reveal the phrase "These investment products are complex structured derivatives and involve a high degree of risk". Depending on whether the print is large or small, the risk ranges from low to high, sometimes the Opportunity Note protects against unexpected risks, sometimes it involves a high degree of risk in itself.
Even the brochure "Special Risks in Securities Trading by the Swiss Bankers Association" – a brochure which is sent to the customers when they open up a depot, i.e. years before they may actually buy a principal-protected product or, depending on the circumstances, also afterwards – even this brochure fails to explain the relationship between issuer risk and principal protection. As a matter of fact, this brochure even cements what principal protection means to the layman anyway:
"What is the maximum possible loss?
The maximum possible loss for the buyer of a structured product with capital protection is the difference between the purchase price and the amount of the capital protection."
(Special Risks in Securities Trading, Swiss Bankers Association, Edition 2001, in use until 2008, p. 14)
Let's hope that lessons will be learnt in both the US and Switzerland and that justice will prevail.