How to Sell Toxic Waste

One point I’ve made a couple of times is that complex structured financial products are sold, not bought. If you want to see how they are sold, check out Zero Hedge’s post on the lawsuit brought by those same Wisconsin school districts that were the subject of the Planet Money/New York Times feature back in November. The second attachment is the Stifel Nicolaus PowerPoint presentation used to sell those school districts a levered bet on a AA- tranche of a synthetic CDO.

It really takes you back to 2006, doesn’t it?

By James Kwak

7 thoughts on “How to Sell Toxic Waste

  1. On the subject of toxic waste, it seems to have gone very quiet in the blogosphere about what happens now that the FDIC loan part of the PPIP has been delayed/ permanently taken off the table. Is the Treasury version, focused on securities, off the table too?

    If so, it seems that recapitalization of the banks was/is considered crucial and yet there may be no plan now to do that. Is the plan the John Hempton insight that US banks can eventually just earn their way out of their balance sheet problems?

    Maybe you guys could shine some more light on this and get the debate going again?

    Regards, Jonathan.

  2. The NYT feature was good stuff as usual from Mr. Kwak.

    Money Quote #1: “I’ve never read the prospectus.” said Marc Hujik, local financial adviser and member of the local school board who spent 13 years on Wall Street. “We all had our questions answered satisfactorily by Dave Noack, so I wasn’t worried.”

    Well……. if Dave (a TRUSTED local investment BANKER) says it’s true….. why bother reading the prospectus?!?!?! I mean, it’s only money for your local school children…. nothing important.

    Money Quote #2: “Selling these products to municipalities was pretty widespread,” said Janet Tavakoli, a finance industry consultant in Chicago. “They tend to be less sophisticated. So bankers sell them products stuffed with junk.”

    Hey folks, remember the deal in Orange County, out around Los Angeles, not that many years ago (around 1994ish)??? Do you think if you were on one of these boards making decisions for school children’s educational resources, it might behoove you to know these things??? Much less just read the newspaper once in a blue moon??? Apparently these folks like Mr. Hojik like the social status of telling people “I’m on the board” but reading a financial prospectus is just a bit too much of a nuisance for them.

  3. I don’t think this is fair criticism. I used to try to read prospectuses on my investments–I gave up a long time ago. They’re just not comprehensible to other than finance professionals. They’re the antithesis of disclosure: they’re gobbledygook. And investment professionals try to exploit their knowledge advantage over their clients all the time.

    What I do think these Boards can be faulted for is failure to retain a truly independent investment advisor who could provide an unbiased professional opinion about these investments. It seems that they were far to ready to accept investment advice from those would be profiting from the sales.

    Whether that would have avoided disaster is a separate question, as it seems that lots of savvy investors who were well positioned to know better still bought these things. But at least they would have responsibly discharged their duties.

  4. There is almost no point in taking sides in this conflict, as there is more than enough blame to go around.

    Having read the complaint and perused the marketing materials on the investments, it is hard to not think there is a special place in the afterlife for the financial professionals involved in these transactions.

    But really, how much disclosure did school board members need to know that these investments weren’t for them? Aren’t the words “synthetic CDOs” enough?

  5. In dealing with the complexities of the modern world, it seems like you have to become an expert or rely upon them. Actually, the truth is in between. You have to question the experts and develop your BS detection. If the expert pats you on the back and says trust me, you can smell a rat. It is harder when they lie to your face.

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