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

Page 1 of 2

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.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

The 10 Longest Wars of All Time

The 13 Worst Looking Foods that Taste Great

The 6 Most Gruesome Injuries Suffered During a Sports Match

The 20 Biggest Contracts in MLB History

The 7 Worst Blown Calls in Sports History

7 Free Ways to Advertise Your Business Online

The 18 Best R&B Songs of the 90’s

The 10 Most Dangerous States to be a Cop

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!