Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The FED cut interest rates by twenty five basis points
Speaker 2: Wednesday and signaled that two more cuts could be coming
Speaker 2: this year.
Speaker 1: Where we got pretty much exactly what the market had expected.
Speaker 2: In anticipation of the announcement, stocks had been climbing, but
Speaker 2: then the news dropped.
Speaker 1: But once people started parsing the dot plant and started
Speaker 1: parsing what j Powell had to say, stocks flit back,
Speaker 1: with the S and P, the Nasdaq ending in the red,
Speaker 1: and a two percent rally in the Russell being almost
Speaker 1: entirely erased.
Speaker 2: Fetchaer. Jerome Powell got to the heart of the market's
Speaker 2: concern in his press conference.
Speaker 3: There are no risk free paths now.
Speaker 1: It's not incredibly obvious.
Speaker 3: What to do.
Speaker 2: Inflation is still elevated, and the labor market is showing
Speaker 2: signs of weakness. It's all keeping investors on edge in
Speaker 2: what's already been a particularly tumultuous year.
Speaker 1: The stock market here in the US sort of record
Speaker 1: highs yesterday.
Speaker 3: Last week's election is one.
Speaker 2: Fact stock market closed out the week with the worst
Speaker 2: day of the year so far.
Speaker 3: This trade war continues to wreak havoc on market and
Speaker 3: Wall Street is sending real signals about the sell off.
Speaker 3: Credible numbers. Here comes just hours after President Trump announced
Speaker 3: a ninety day pause on tariffs for many countries. The
Speaker 3: S and P five hundred major over the past two
Speaker 3: days has shed over five trillion dollars in value.
Speaker 2: Okay, that is the worst that we have seen since COVID.
Speaker 2: All those zigs and zags of the stock market have
Speaker 2: been unsettling to many investors, but they've also helped fuel
Speaker 2: the rise of a special kind of investment vehicle. Structured products.
Speaker 4: In the simplest term, structured products are effectively at debt security.
Speaker 2: That's Sam Potter, who edits Bloomberg's Markets coverage. Structured products
Speaker 2: or structured notes are complicated financial instruments, a hybrid between
Speaker 2: a historically low risk bond and a higher risk derivative
Speaker 2: like a stock option or future.
Speaker 4: So combining the best of both worlds.
Speaker 2: They're often pitched as a smart way for investors to
Speaker 2: hedge against risks when the market outlook is more volatile,
Speaker 2: like it is now. Structured products had fallen out of
Speaker 2: favor in the US in the wake of the two
Speaker 2: thousand and eight financial crisis, when Lehman Brothers collapsed. Billions
Speaker 2: of dollars worth of structured products were wiped out along
Speaker 2: with it, but nearly two decades later, structured products are back.
Speaker 2: Last year, the American market for these products was worth
Speaker 2: nearly two hundred billion dollars, a record high, and this
Speaker 2: year it's on course to be even bigger.
Speaker 3: People are looking for an alternative way to grow their
Speaker 3: wealth and also protect it.
Speaker 2: It's a shift. Bloomberg Equities reporter ye Chin Shen has
Speaker 2: been tracking.
Speaker 3: With interest remembers these structure notes. They function like a
Speaker 3: bond for most pot but they are not a bond,
Speaker 3: and that's the catch.
Speaker 2: I'm Sarah Holder, and this is the big take from
Speaker 2: Bloomberg News Today. On the show The Rise of Structured
Speaker 2: Products in a Volatile market, The investment vehicles are being
Speaker 2: marketed as a winning vet, but the reality is more complicated.
Speaker 2: Structured products are complex by design. So I called up
Speaker 2: Yachin Sheen to help me understand how they work.
Speaker 3: I am a reporter on the equities team, so I
Speaker 3: cover Abigehres and Alstin's complex.
Speaker 2: Structured products, also known as notes, are designed to combine
Speaker 2: the rewards of investing in stocks with the security of
Speaker 2: investing in bonds.
Speaker 3: It's a hybrid instrument, so it is a bond with
Speaker 3: an all hunts twist.
Speaker 2: Part of the product functions a lot like investing in
Speaker 2: a bond. You're supposed to get fixed returns over time,
Speaker 2: but the other part of the product functions more like
Speaker 2: an investment in the stock market.
Speaker 3: The derivative of the auction pod is what makes things
Speaker 3: really splicy of because now that you have your return
Speaker 3: linked to some other assets. It could be an index,
Speaker 3: a stock, or a boss code of that.
Speaker 2: So that's what makes it a hybrid instrument with a twist.
Speaker 2: By combining these properties, they're supposed to offer investors all
Speaker 2: the safety of a bond, but with higher returns, but
Speaker 2: those returns depend a lot on the performance of the
Speaker 2: asset they're linked to. There are a bunch of different
Speaker 2: kinds of structured products, but the most popular version is
Speaker 2: known as an auto callable. They make up more than
Speaker 2: half of the structured products on the market right now.
Speaker 2: When you buy an autocallable, you invest in a product's
Speaker 2: performance over a certain amount of time, say four years.
Speaker 3: So example, what be a auto callable that is linked
Speaker 3: to SMP five poundred.
Speaker 2: At six states. Throughout the term of your investment, say
Speaker 2: every quarter, you can elect a certain amount of money
Speaker 2: in coupons, just like a bond interest payment. Provided the
Speaker 2: underlying asset performs in just the right way.
Speaker 3: As long as SMP five pondre the underlying stay wins
Speaker 3: to arrange them, you will get your coupons, and by
Speaker 3: the end of the null ends you will get your
Speaker 3: money back the principle back.
Speaker 2: The extra twist with an autocallable is if on one
Speaker 2: of those dates the value of the SMP is over
Speaker 2: a certain threshold, say again of ten percent from its
Speaker 2: starting level, the term of the investment automatically ends early.
Speaker 3: If you know, the market goes really well and the
Speaker 3: SMP jumps walls and ten percent, you'll not well get
Speaker 3: called back earlier.
Speaker 2: Meaning even if you'd bought a four year structured product,
Speaker 2: the deal is over. The issue werk cashes you out.
Speaker 3: But that's not bad, right, because you get your money
Speaker 3: back some couppoons.
Speaker 2: Now, you might not make as much money as you
Speaker 2: would have if if you just invested directly in the SMP,
Speaker 2: but you can still theoretically earn a decent return without
Speaker 2: taking on as many risks as you would have betting on.
Speaker 3: Stocks, and usually what happens is that people wazir proceeds
Speaker 3: back we invest.
Speaker 2: One reason people reinvest, especially when things are volatile, is
Speaker 2: because the underlying investment doesn't have to perform that well
Speaker 2: for you to get paid. So as long as it
Speaker 2: stays below that ceiling, you get your coupons. You don't
Speaker 2: want it to outperform, but you also don't want it
Speaker 2: to underperform, because in an autocallable there isn't just a ceiling,
Speaker 2: there's also a floor.
Speaker 3: The wolf case well be if the market really you know,
Speaker 3: flops and it drops below certain flow, it could be
Speaker 3: usually thirty to forty percent. That's where you started to
Speaker 3: lose money. And by that time there's no limitation how
Speaker 3: much you would lose. You lose as much as the
Speaker 3: market suffers.
Speaker 4: Got it.
Speaker 2: So, in an autocullable, you're getting your coupons, everything's going well.
Speaker 2: In less something horrible happens, then you might lose a
Speaker 2: lot of money.
Speaker 3: Yeah, exactly. There's another way to think about it. You
Speaker 3: can picture two options. One is that okay, you stand
Speaker 3: under a solid roof. That's like buying a typical bond,
Speaker 3: you get very steady, solid return, very safe or compared
Speaker 3: to you can buy and carry an umbrella. That's like
Speaker 3: buying a structure note. So with that umbrella you can
Speaker 3: now go out and walk it wrong.
Speaker 2: Walking around outside under your structured product umbrella might be
Speaker 2: less cozy than staying home, but it gives you more
Speaker 2: chances to make returns in this universe. Pretend buying that
Speaker 2: umbrella gives you the opportunity to collect a five dollars
Speaker 2: bill on the sidewalk every few blocks.
Speaker 3: When the weather is decent. You know everything's good, You
Speaker 3: get the returns, and even it gets a bit of windy,
Speaker 3: totally fly. But the real task is when a storm hits.
Speaker 2: A storm being a market crash or an extreme dip
Speaker 2: in stock performance, that's.
Speaker 3: Where your umbrella phillips and you get sold and the
Speaker 3: money blows away. So that's the worst case and you suffer.
Speaker 2: So if you want to be really safe, just live
Speaker 2: in your house. But if you want to take on
Speaker 2: a little bit of risks, have the opportunity to make
Speaker 2: a little bit more money, you can buy the umbrella.
Speaker 2: You can buy the structured note, roam free and hope
Speaker 2: that a big storm doesn't come exactly. This is the
Speaker 2: whole pitch behind buying a structured product. Your upsides might
Speaker 2: be capped, but at least your downsides are capped too, unless,
Speaker 2: of course, the big storm hits.
Speaker 4: They're marketed as hitting the sweet spot between safety and speculation.
Speaker 2: That's Sam Potter, a senior editor with the Market's team
Speaker 2: at Bloomberg, and he says that's why structured products tend
Speaker 2: to sell well in moments when the markets feel unpredictable
Speaker 2: and investors are uncertain.
Speaker 4: Moments like now, when valuations get very lofty, people get nervous,
Speaker 4: especially when you've got kind of trade war situation, a
Speaker 4: lot of geopolitical tensions, and unpredictable administration in the White House.
Speaker 4: People don't want to eschew the chance for more returns,
Speaker 4: but equally they don't want to have everything at risk,
Speaker 4: and they see structured products as a way to maybe
Speaker 4: have a little bit of security on their principle, but
Speaker 4: still get the returns. So I'm not surprised at all
Speaker 4: that the interest is picked up. They've always been big
Speaker 4: in Europe and in Asia, but finally catching hold in
Speaker 4: the US.
Speaker 2: Last year, financial firm sold a record one hundred and
Speaker 2: ninety four billion dollars worth of structured notes to American investors.
Speaker 2: This year is expected to top that, and not just
Speaker 2: because people are feeling uncertain but because banks see that
Speaker 2: uncertainty as an opportunity.
Speaker 4: If managed correctly effectively, people are buying these notes and
Speaker 4: they don't tend to sell them off. That's it rarely
Speaker 4: a secondary market, so it's a form of sticky capital
Speaker 4: for banks to get good deposits to have.
Speaker 2: Selling structured products can help banks bring in more fees
Speaker 2: while capping the amount they have to pay investors. But
Speaker 2: for the investors themselves, there are more risks lurking in
Speaker 2: the fine print. That's after the break. Recently, retail investors
Speaker 2: have started parking more of their money in special investments
Speaker 2: called structured products. The pitch is simple, if investing in
Speaker 2: the stock market is too risky and investing in bonds
Speaker 2: is too vanilla, structured products could be just right. But
Speaker 2: Bloomberg Market's editor Sam Potter told me they might not
Speaker 2: be right for everyone.
Speaker 4: Risk is just a complexity. Do you really understand the
Speaker 4: risk profile of what you're taking on? I mean, we've
Speaker 4: talked about kind of quite simple examples. Something that's just
Speaker 4: tied to the range of the S and P five hundred.
Speaker 4: But the notes can get really complicated. You could bring
Speaker 4: in another couple of indexes and say the lowest of
Speaker 4: this is the range that we're going to use, and
Speaker 4: we're going to use these set dates for measurement. So
Speaker 4: the first thing is just the sheer complexity. The second
Speaker 4: thing is understanding the fees. You pay the fee up
Speaker 4: front in the price of the product, which is unlike
Speaker 4: something like an ETF which has an ongoing fee. So
Speaker 4: do you really understand if you're getting your value for money?
Speaker 2: Often, Sam says the answer is no. Plenty of people
Speaker 2: invest in structured products without fully understanding them. They've earned
Speaker 2: the nickname boomer candy because of how popular they've gotten
Speaker 2: with a particular kind of wealthy retiree, someone with money
Speaker 2: to spare and a higher appetite for risk.
Speaker 4: I think the danger is the complexity maybe does obscure
Speaker 4: the risk that could be underlying these things.
Speaker 2: Those risks include the possibility of losing more than you
Speaker 2: bargained for in a market downturn, or of paying too
Speaker 2: much to make a bet that could turn out to
Speaker 2: be bad. And there's another more fundamental risk that even
Speaker 2: if the bank has essentially guaranteed you'll get your principal
Speaker 2: investment back, your bank could fail and you could lose everything.
Speaker 3: It was a manic Monday in the financial markets.
Speaker 1: Lehman Brothers, a one hundred and fifty eight year old firm,
Speaker 1: filed for bankruptcy.
Speaker 4: Leman in particular stands out because in the last year
Speaker 4: or so of its operation, it was struggling to raise
Speaker 4: money elsewhere, and so it actually ramped up the production
Speaker 4: and sales of these structured notes. It was already a
Speaker 4: big issuer, but in that last year, as I understand,
Speaker 4: it really rempt up production of its structured notes in
Speaker 4: order to bring more money into the bank.
Speaker 2: As Leman struggled to raise money, it started leaning more
Speaker 2: into structured products.
Speaker 4: And funnily enough, lots of those products that were sold
Speaker 4: were principal protection notes. So they actually a lot of
Speaker 4: them were even named, you know, one hundred percent principal
Speaker 4: protection tied to S and P five hundred or words
Speaker 4: to that effect.
Speaker 2: One hundred percent principal protection, which means, in theory, one
Speaker 2: hundred percent of that initial investment would be paid back
Speaker 2: as long as that note was held to maturity, and they.
Speaker 4: Sold a great deal of them in the last year
Speaker 4: before everything finally collapsed.
Speaker 2: And what happened when Lehman collapsed in two thousand and eight,
Speaker 2: what happened to everyone who had bought those structured notes, I.
Speaker 4: Mean, effectively, what they were told in the aftermath was
Speaker 4: these things are now worthless. So you've lent your money
Speaker 4: to the bank. The bank has gone under. And actually
Speaker 4: where structured products tend to sit in the hierarchy of
Speaker 4: people who can get money out of bankruptcy is pretty low.
Speaker 4: I do believe believe that there were many years of
Speaker 4: litigation that followed the Lehman collapse, and more than ten
Speaker 4: years of litigation we're talking. And some of those structured
Speaker 4: product owners did get some of their money back, but
Speaker 4: billions of dollars were wiped out and a lot of
Speaker 4: people didn't get repaid.
Speaker 2: Sam says the Lehman incident really tarnished the reputation of
Speaker 2: structured products in the US.
Speaker 4: It really set the market back, and it has really
Speaker 4: been until this decade. It's taken to recover. You can
Speaker 4: go back and trace the market and the growth is
Speaker 4: very anemic. After Lehman Brothers, it falls off and then
Speaker 4: it's very very slow to come back, and it's only
Speaker 4: really kind of twenty twenty one onwards that it's really
Speaker 4: begun to take off again. I guess people required that
Speaker 4: time at distance to put the pass behind. But also
Speaker 4: the circumstances as we just discussed of high asset valuations
Speaker 4: have kind of rekindled an interest in the notes.
Speaker 2: These products are only as strong as the institution and
Speaker 2: that backs them, which is one reason why, unlike in
Speaker 2: some other parts of the world, they're heavily regulated in
Speaker 2: the US. Depending on what the underlying asset is and
Speaker 2: who distributes it, a structured note could be regulated by
Speaker 2: the SEC, FINRA and the CFTC. Another reason for all
Speaker 2: the oversight, structured notes are increasingly sold to individual investors.
Speaker 2: While hedge funds and sophisticated money managers can and do
Speaker 2: buy structured products, many are able to create the same
Speaker 2: exposures on their own. Here's equities reporter Yu Chinshen.
Speaker 3: If you are savvy enough, you can package those products
Speaker 3: on your own. Because it is a bond, right to
Speaker 3: break it down, fundamentally, it's a bond and an auctum package.
Speaker 3: You can just go to the market and create or
Speaker 3: replicate some similar auctionum package without paying your bank or
Speaker 3: going through the middleman to give you advice, right, and oh,
Speaker 3: exactly what the payout it's going to be.
Speaker 2: But for everyone else, there's a broader lesson to take
Speaker 2: away from this. You might want to tread a bit
Speaker 2: more carefully when you're sold something with this much fine print.
Speaker 4: You should see the sheets that come with these things.
Speaker 4: It's like a financial contract and it's got all the
Speaker 4: small print. And anytime Wall Street cooks up something complicated,
Speaker 4: I think people should be certainly careful about it.
Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.
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Speaker 2: Thanks for listening. We'll be back tomorrow