How to Lose Billions on This Fad Investment: Apple Inc. (AAPL), Goldman Sachs Group, Inc. (GS), Citigroup Inc. (C)

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During the financial crisis, Wall Street firms got a reputation for making money at their clients' expense. Yet years after the end of the crisis, Wall Street's finest are still providing their clients with access to complicated financial products, and one recent episode shows how those products can go awry for unsuspecting investors.

Late last month, Goldman Sachs Group, Inc. (NYSE:GS) reported in a filing with the SEC that it had sold nearly $30 million in complex debt instruments called structured notes that were tied to the performance of Apple Inc. (NASDAQ:AAPL). That sale happened to come immediately before Apple released its most recent earnings report, after which the stock plunged. Although Goldman vehemently denies that it made money at the buyer's expense, various firms have sold billions of dollars in structured notes tied to Apple Inc. (NASDAQ:AAPL) and other investments in the past year, and given the tech giant's losses, many of those notes have worked out badly for their buyers.

Apple Inc. (NASDAQ:AAPL)How structured notes work Structured notes were designed to cater to the need among investors for substantial and dependable income. In general, they involve short-term bets on market benchmarks or individual stocks, offering yields well in excess of what the targeted investment offers in dividends. For instance, as Bloomberg reported, some of the notes that Goldman sold on Apple Inc. (NASDAQ:AAPL) earlier in January were designed to pay a yield of more than 9% per year for as long as three years, with protection for investors' principal as long as the stock avoided losses of more than 30%.

But there's no such thing as a free lunch on Wall Street, and the lucrative income from structured notes comes with a catch. If the stock does fall below a certain threshold, then the company that sold the notes can force investors to accept shares of stock in repayment of the note rather than cash. Moreover, the notes are structured so that the amount of stock investors receive in case of a loss leaves them holding the bag for the entire amount of the loss. And to add insult to injury, after the threshold is triggered, the clock stops on any further income payments from the note, leaving investors with far less in total income than they expected when they first entered into the transaction.

A big bet When shares don't drop, the deals can work out exceedingly well. For instance, back in September, Citigroup Inc. (NYSE:C) sold structured notes on Facebook Inc (NASDAQ:FB) that paid a 17% yield for a one-year term, with a threshold loss of 35% below the roughly $19.35 per share price on the day of the note sale. Nearly six months later, Facebook shares have rebounded sharply, and the note buyer seems likely to get the full benefit of that 17% return.

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