Structured Notes Will Be “The Next Bubble” According to Former Federal Reserve Official


Wall Street banks have created the “next investment bubble” by creating and selling complex, opaque structured notes to income oriented investors, according to an August 9, 2010 Bloomberg article by Zeke Faux and Jody Shenn, “Structured Notes Are ‘Next Bubble,’ Whalen Says.” In fact, Christopher Whalen, a former Federal Reserve Bank of New York official and managing director of Institutional Risk Analytics, claims that Wall Street “firms are busily creating the next investment bubble on Wall Street — this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all — that is, pure derivatives.” Mr. Whalen’s words carry great weight, since he predicted the collapse of the mortgage backed securities market in March 2007.

A structured note is a security that is linked to a reference asset, such as the S&P 500 stock index. Structured notes are often sold to retirees who are concerned about preservation of principal by promises of “downside protection” or “principal protection.”

However, at bottom, a structured note is just the unsecured debt of the issuer, and both the indexed returns and promises of downside or principal protection are totally dependent upon the solvency of the issuer. In the case of structured notes issued by Lehman Brothers, investors who were told they had, in essence, stock investments with principal protection, now have only claims as general unsecured creditors against the bankruptcy estate of Lehman Brothers.

Structured notes “often come with only minimal disclosure,” and are being pitched by Wall Street banks using the same “loophole” that allowed unregulated over-the-counter sales of collateralized debt obligations and auction-rate securities, according to Whalen.

Wall Street is apparently anticipating a disaster and is poised to profit from it. “We already know of two hedge funds that are being established specifically to buy this crap from distressed retail investors as and when rates start to rise,” Whalen was quoted as saying.

If you have lost money in a structured note, you should consult with an attorney with experience in representing investors in securities matters, including those involving structured notes.

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 30 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling investors regarding their investment problems, including those involving structured notes. For further information, please contact us.