Risks Increase for Structured Products Involving Bank of America, Citigroup and Wells Fargo


The risks are increasing for investors in principal protected notes, reverse convertibles and other structured products associated with Bank of America, Citigroup and Wells Fargo. Moody’s recently announced that it has downgraded the debt of those financial institutions. One reason given: the U.S. government is unlikely to bail them out again. “It is more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute,” said Moody’s.

Bank of America may be the shakiest of the three. Observers are wondering how BofA will manage its anticipated $50-100 billion liability for the toxic mortgage-backed securities it is on the hook for as a result of its acquisition of Countrywide Financial. The bank is being sued by institutional bond investors including AIG, the Federal Housing Finance Agency, and others. On top of that, the bank has $40 billion in corporate debt coming due, will need to raise $50 billion to comply with new international banking regulations, and would reportedly need to raise so much capital that this could hamper its ability to earn money by making loans. Bank of America is considering eliminating 40,000 positions as a first wave of cuts.

All three banks have issued hundreds of millions of dollars of structured products, including principal protected notes and reverse convertibles.

Principal protected notes, reverse convertible notes and other structured products are essentially combinations of notes and options linked to the value of a “reference asset,” such as a stock, an index of stocks, currencies, or interest rates. They are unsecured obligations of the issuer, and consequently subject the investor to the credit risk of the issuer as well as other risks pertaining to the payout at maturity.

For example, Citigroup has sold hundreds of millions of dollars of reverse convertibles. One Citigroup offering involved $60.7 million of structured products linked to the price of Wells Fargo stock. Investors in the Wells Fargo linked notes are reportedly at risk of losing money is Wells Fargo falls below $16.64/share.

Investors in reverse convertibles receive a note with an above-average yield linked to a reference asset, usually a stock. As part of the package, the investor essentially sells the issuer a put option, which gives the issuer the right to pay the investor back by assigning a possibly worthless stock if the stock’s price falls below a certain point.

The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have reminded firms of their duties and obligations to fully and fairly explain the risks of these investments to potential investors. Because firms have not explained the risks, however, FINRA and the SEC issued their warnings about structured products.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving principal protected notes, reverse convertibles and other structured products. For further information, please contact us.