COMPLEX DERIVATIVES EQUALS COMPLEX PROBLEMS
STRUCTURED notes were a major component of profitability for some of the banks that were too large to fail. The Bank of America became the poster boy for this problem in October when it was reported in a New York newspaper that some of his employees were allegedly overselling complex derivative products. Structured notes can be very profitable to the dealers who market and remarket those notes. It became a major problem when Bank of America reportedly told investors that the products were of lesser risk than they turned out to be. Structured notes are derivatives, which are financial contracts which have sometimes been referred to as “bets”; on the volatility or sales price of stocks and bonds or other securities. Structured notes are usually for a specific period of time. The problem for Bank of America was the accusation that they aggressively pushed some of these derivative products on their own customers. It gets worse: the period in question is right in the middle of the great financial problems of 07 and 08, and the allegation is that the warnings were not commensurate with the risk involved in the purchase of those derivatives.