Goldman Sachs wins my Dubious Distinction Award

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Sulvar
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Sulvar »

On another note, am I understanding the "sum of monthly returns, capped at 1.5% and not compounded" correctly?

Month 1: DJIA up 20% (you get +1.5%)
Month 2: DJIA down 2% (you get -2%)
Month 3: DJIA flat (you get 0%)

Total return for you based on "sum of monthly returns, capped at 1.5%) is -0.5%, this despite the fact that over this 3 month period the DJIA was up 17.6%.

If this is the case, I just don't see how this formula could ever capture any of the gains of the DJIA over a 4 year period. Doing some quick math, the DJIA has been up ~300% since 1991, but if you sum the monthly returns and cap them at 1.5% you would actual end up down 136% over that time frame--frankly down 136% doesn't make sense, but it doesn't make sense to sum monthly returns either.
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Epsilon Delta
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Epsilon Delta »

dnaumov wrote:I can't believe Larry (and a whole bunch of others) seem to be entirely missing the point.

Nobody is saying that this GS product is a good choice for the investor. Nobody is denying that you can get a better end result by combining a CD and a tiny part of the money dedicated to a stock index fund. These are both completely true and obvious things.

The issue is directly comparing the GS FDIC-insured CD to "things that are not an FDIC-insured CD". These comparisons are blatantly misleading. If you have to do comparisons, compare CDs to CDs.
You will find that the FDIC-insurance only applies to the "fixed" part. $1000 in this GS CD has the same FDIC guarantee as $950 in an 1.8% Ally CD and $50 on double zero. Comparing the GS hibred to a traditional CD is blatantly misleading.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by yobria »

dnaumov wrote:I can't believe Larry (and a whole bunch of others) seem to be entirely missing the point.

Nobody is saying that this GS product is a good choice for the investor. Nobody is denying that you can get a better end result by combining a CD and a tiny part of the money dedicated to a stock index fund. These are both completely true and obvious things.
I'd say it's completely and entirely untrue, since allocating a portion to a stock index fund risks principal.

Nick
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by larryswedroe »

dnaumov
I did not miss that point at all,
What you are making mistake as is Brody is form over substance
What you call something , or what licence you need is totally irrelevant. What matters only is what the risks/returns correlate with. That defines the type of product it is

Brody your next example is also wrong. The one with floating rates is not tied to equities but bonds so it is not a hybrid product, just a different type of fixed income product


Best
Larry
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dnaumov
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by dnaumov »

yobria wrote:
dnaumov wrote:I can't believe Larry (and a whole bunch of others) seem to be entirely missing the point.

Nobody is saying that this GS product is a good choice for the investor. Nobody is denying that you can get a better end result by combining a CD and a tiny part of the money dedicated to a stock index fund. These are both completely true and obvious things.
I'd say it's completely and entirely untrue, since allocating a portion to a stock index fund risks principal.

Nick
As has been previously pointed out in this thread: if you take a 95% allocation to a CD yielding just 0,53% annually and a 5% allocation to stocks, you cannot lose your principal (the total original amount invested) even if the stocks go to 0.
You could get a CD for above 1,5% annually and that would allow you to have even more % of your total initial investment dedicated to stocks and it still would be impossible for you to lose the total sum of your original investment even if stocks went to 0.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by dnaumov »

larryswedroe wrote:dnaumov
I did not miss that point at all,
What you are making mistake as is Brody is form over substance
What you call something , or what licence you need is totally irrelevant. What matters only is what the risks/returns correlate with. That defines the type of product it is
Larry, I am guilty as charged, because I think that form is, in fact, important.

For the record, I think it's equally silly to do direct comparisons of VT to VTI+VXUS (except for educational purposes). If I wanted to compare VT to equivalent offerings, I would be doing exactly that, comparing it to similar 1 fund solutions.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by larryswedroe »

dnaumov
Got news for you, form is irrelevant, all that matters is substance
It is substance that determines the risk and potential rewards, not the form.
First rule of risk management.
Best wishes
Larry
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by newbie001 »

Sulvar wrote:On another note, am I understanding the "sum of monthly returns, capped at 1.5% and not compounded" correctly?

Month 1: DJIA up 20% (you get +1.5%)
Month 2: DJIA down 2% (you get -2%)
Month 3: DJIA flat (you get 0%)

Total return for you based on "sum of monthly returns, capped at 1.5%) is -0.5%, this despite the fact that over this 3 month period the DJIA was up 17.6%.

If this is the case, I just don't see how this formula could ever capture any of the gains of the DJIA over a 4 year period. Doing some quick math, the DJIA has been up ~300% since 1991, but if you sum the monthly returns and cap them at 1.5% you would actual end up down 136% over that time frame--frankly down 136% doesn't make sense, but it doesn't make sense to sum monthly returns either.

My thoughts exactly. If there is no floor on the monthly return, the product is an incredible ripoff. The return for 2009, when the S&P 500 was up something like 27% (I think, off the top of my head), would have been negative.

Edit: I just saw the thread Lady Geek linked to that says there is in fact no floor on the monthly returns. What an absolute scam.
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momar
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by momar »

No one is comparing this thing to something that has no FDIC protection. Everyone is comparing it to something that has FDIC protection. What is so hard to understand about holding 95% in a 4 year CD with FDIC protection of principal and interest, and 5% in something else? 95% in a 4 year CD, at current rates, yields a better minimum return than 100% in this GS product, and has better upside, better liquidity, and better safety in event the bank goes bust (principal + interest insured vs just principal).
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

baw703916 wrote:
Brody wrote:
Substance:
Jim invests $250,000 in this product. GS Bank goes out of business tomorrow. Jim's $250,000 is protected.
Compare it against something else that has this same safety.
Jim buys a Treasury of the same duration and an SPY call spread using the interest on the Treasury.

How does he not end up better off (with the same safety)? In fact, he can invest more than $250,000 this way with the same safety.

Brad
You'll have to explain to me how one can be guaranteed to end up better with this strategy. I'm not saying that he won't. I'm just asking for an explanation.

The other issue is simply one of regardless of whether something is "better", it doesn't matter too much if it isn't something that a relatively unsophisticated CD buyer will do.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Epsilon Delta wrote:
dnaumov wrote:I can't believe Larry (and a whole bunch of others) seem to be entirely missing the point.

Nobody is saying that this GS product is a good choice for the investor. Nobody is denying that you can get a better end result by combining a CD and a tiny part of the money dedicated to a stock index fund. These are both completely true and obvious things.

The issue is directly comparing the GS FDIC-insured CD to "things that are not an FDIC-insured CD". These comparisons are blatantly misleading. If you have to do comparisons, compare CDs to CDs.
You will find that the FDIC-insurance only applies to the "fixed" part. $1000 in this GS CD has the same FDIC guarantee as $950 in an 1.8% Ally CD and $50 on double zero. Comparing the GS hibred to a traditional CD is blatantly misleading.
You are incorrect. $1000 will have $1000 of FDIC coverage.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

larryswedroe wrote:dnaumov
I did not miss that point at all,
What you are making mistake as is Brody is form over substance
What you call something , or what licence you need is totally irrelevant. What matters only is what the risks/returns correlate with. That defines the type of product it is

Brody your next example is also wrong. The one with floating rates is not tied to equities but bonds so it is not a hybrid product, just a different type of fixed income product


Best
Larry
Let me see if I'm understanding what you are saying.
If something is linked to equities, it is a hybrid product.
If something is linked to bonds, it is not a hybrid product.

Equities...securities...can go up and down in value
Bonds...securities...can go up and down in value

How is the fact that bonds are called fixed income relative to this conversation? "Fixed product" is not the same as "fixed income". There is a reason why a different license is needed for fixed income as opposed to fixed products. They aren't the same. You are the one who is talking about risks and rewards. Fixed income has the risk of loss of principal. Fixed products don't have this risk.

All fixed products are at least loosely tied to securities, but none of them are actually securities.

It seems to me that if they were truly hybrid products, they would have to be registered with the SEC.
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momar
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by momar »

Brody wrote:
Epsilon Delta wrote:
dnaumov wrote:I can't believe Larry (and a whole bunch of others) seem to be entirely missing the point.

Nobody is saying that this GS product is a good choice for the investor. Nobody is denying that you can get a better end result by combining a CD and a tiny part of the money dedicated to a stock index fund. These are both completely true and obvious things.

The issue is directly comparing the GS FDIC-insured CD to "things that are not an FDIC-insured CD". These comparisons are blatantly misleading. If you have to do comparisons, compare CDs to CDs.
You will find that the FDIC-insurance only applies to the "fixed" part. $1000 in this GS CD has the same FDIC guarantee as $950 in an 1.8% Ally CD and $50 on double zero. Comparing the GS hibred to a traditional CD is blatantly misleading.
You are incorrect. $1000 will have $1000 of FDIC coverage.
The GS product has only its principal covered by the FDIC.

A traditional CD has its principal and interest covered by the FDIC.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

The GS product has only its principal covered by the FDIC.

A traditional CD has its principal and interest covered by the FDIC.
Can you please point me to a source on that. I have read that several times on this thread, but in trying to look into this further, I can't locate that information. If you can't direct me easily, is that information that you are parroting or are you sure that you are correct? I have no idea of the correct answer.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by yobria »

dnaumov wrote:As has been previously pointed out in this thread: if you take a 95% allocation to a CD yielding just 0,53% annually and a 5% allocation to stocks, you cannot lose your principal (the total original amount invested) even if the stocks go to 0.
Yes I see that response from nisiprius (missed it before) but I don't get it. Over four years, a $95 investment at .053% grows to only $97. So if stocks go to zero you could still lose principal.

Nick
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

larryswedroe wrote:As director of research for the Buckingham Family of Financial Services I have been asked to analyze hundreds of structured products over the years. Not once have I seen one that made any sense for investors.
So it was no surprise to see that the new Goldman CD would be bad, but just how bad surprised even me.

http://www.cbsnews.com/8301-505123_162- ... ColumnArea

Best wishes
Larry
Larry, let me ask you about something that I see as a flaw in the methodology in your comparison from the original article. This product is a CD that is guaranteeing a minimum APY of .5%. Part of the decision making process with this product is a consideration of what current conventional CDs are paying.

When CDs are paying 6%, people aren't going to buy this product. However, as I write this, I believe that the best rate that someone can get on a 4 year CD is 2%. Therefore, a comparison using the past when CD rates were higher seems completely meaningless since one can't buy a CD paying those higher rates.

This can be compared against a 4 year CD paying 2%. Or it can be compared against shorter CDs paying much less than that and then GUESSING what future rates will be.

This is a product that will only be purchased when interest rates are low.
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Epsilon Delta
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Epsilon Delta »

Brody wrote:
The GS product has only its principal covered by the FDIC.

A traditional CD has its principal and interest covered by the FDIC.
Can you please point me to a source on that. I have read that several times on this thread, but in trying to look into this further, I can't locate that information. If you can't direct me easily, is that information that you are parroting or are you sure that you are correct? I have no idea of the correct answer.
See for example page 4 of
http://www.mofo.com/files/Uploads/Image ... sue-13.pdf
I would be interested in reading the text of the August 21st letter since it is referred to in footnotes all over the place (search on the exact text of the footnote if interested) but I can't find the letter itself.
It is important to note that the FDIC insurance is limited to the principal invested and any guaranteed interest rate,
but not the “contingent” interest.3 For example, in the hypothetical scenario outlined above, if the issuing bank failed
prior to the maturity date of the SCD, the FDIC takes the position that the FDIC insurance would cover the $1,000
investment, but not the $200 of earnings based on the performance of the DJIA. Further, investors are still subject to
the direct credit risk of the issuing bank for any dollar amount over the maximum applicable deposit insurance
coverage—for example, if the investor holds other deposits with the applicable bank that together exceed $250,000.

...

3 Letter of August 21, 2000, to the Honorable Sharon G. Bias, Commissioner of Banking, State of West Virginia, from Joseph A. DiNuzzo, FDIC Counsel.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Epsilon Delta,

Thanks so much for that link. From my reading of that link, it appears to me that the question of whether the interest is covered is "it depends".

First of all, it depends on exactly how this GS product works. Does somebody have the exact information or are we just guessing at this point? From what I can tell people have just heard snipets of information and then are hypothesizing about how exactly the product works.

Your link talks about "contingent" interest. I'm guessing based upon what I read is that "contingent" interest is interest that has not yet been earned.

Is the interest covered?:
The DJIA increases by the following amounts: January 4%, February 1%, March .5%

Product 1 pays interest monthly capped at 1%. Every month it pays the accumulated interest. So, every month, this product will earn between 0 and 1% interest. The bank fails on April 1st.

Product 2 pays interest annually. Interest paid is based upon the gain/loss of the DJIA for the entire year. 1% is guaranteed. The bank fails on April 1st.

From my understanding, the interest on Product 1 is earned and not "contingent" and will be paid. The interest on Product 2 is still "contingent" on how the DJIA does for the rest of the year, so it has not yet been earned and therefore, not insured except for .25% (3 months out of 12 at a guaranteed 1%).

I don't know if my understanding is correct.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by larryswedroe »

Brody
if something is linked to two different asset classes, like the GS product it is a hybrid

If something is linked to bond indices it is fixed income, but with VARIABLE rate which is unknown. But it is all a fixed income investment. If you wanted to call it a hybrid fixed income I would not object.

And you need to really give up this nonsense about SEC and registration as whether one has to register or not does not impact the risk or expected return of the investment, that is determined by its structure

You are so hung up on form IMO that you have lost the forest for the trees.

Sorry but I don't see this being productive with any further discussion.

Best wishes
Larry
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

And you need to really give up this nonsense about SEC and registration as whether one has to register or not does not impact the risk or expected return of the investment, that is determined by its structure

Larry, you are really missing a major point. If you want to argue that it is the structure that matters, that is fine. However, you then must ask yourself why the structure does not need SEC registration.

It does not need SEC registration because there is no investment risk.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by ddb »

Sulvar wrote:DDB, you are failing for the exact sales pitch that is designed to sell this terrible product, the fact that it has zero risk to principal. It has already been stated multiple times on this thread and in Larry's article but if you look at the following investments as black boxes that cost $100,000 each:

Black Box #1 Goldman Sachs structured product
1) CD with minimum 0.5% interest over 4 years and upside linked to DJIA but capped at 1.5%
After 4 years your min guarantied back is $100,000 @ 0.5% interest per year = $102,015

Black Box #2
1) Inside you have a $92,400 4 year CD at Penn Fed @ 2%
2) $7,600 invested in an index fund that tracks the DJIA
After 4 years just from the CD portion of your black box you will get $100,016.

Black Box #3
1) Inside you have a $92,400 4 year CD at Penn Fed @ 2%
2) $7,600 invested in Harry Potter Lego sets
After 4 years just from the CD portion of your black box you will get $100,016

Wouldn't you agree that from the outside all three black boxes have zero risk to principal (your initial $100,00 investment) over 4 years? If you agree with this, then the task becomes figure out what the expected returns for black boxes #1, #2, and #3 are over 4 years. As Larry's article shows, in rolling 4 year time frames over the last 20 years, the Goldman Sachs product would only outperform black box #2 0.5% of the time. That is pretty definitive to me.
You are making apples-to-apples comparisons, whereas Larry did not. Larry compared the GS product to five different portfolios, only one of which would return your principal after four years (the 5/95 portfolio). Also, he didn't even mention this important feature in the article, i.e. that the 5/95 portfolio would also return your principal.

So yes, I think we all agree that this product is garbage. However, it is garbage because of its own structure and the fact that it is unattractive compared to other principal-guaransteed strategies, and not because it has underperformed a strategy with an equity component over an arbitrary period.

There are other problems, too. The GS CD is being compared to portfolios which include CDs that were earning much higher rates of return. If the GS CD had been offered in, say, 1991, the guaranteed minimum rate would almost certainly have been higher.

- DDB
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Here's a question for everybody who thinks that this is a terrible product:

Have you read the disclosure statements?

I haven't so I have no idea if it is any good or not.
If you haven't read them, it seems to not be very intelligent to make a judgement on a product based upon what others have said. This is true even if you trust the judgement of those people since you have no idea whether they have read the disclosures.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Valuethinker »

baw703916 wrote:
Are there any situations where this Goldman Sachs CD makes sense?
Yes, they make lots of sense if you are invessted in Goldman Sachs (which I am through index funds). I won't be buying any personally, though.

This is in fact, much worse than the market linked CDs. Which are, in turn, worse than buying Treasuries + an S&P spread. Which are are usually worse than just setting a reasonable AA.
Not sure about Goldman, but in The Big Short, Michael Lewis notes that an investor in Salomon Brothers (the first investment bank to go public), who held until Citigroup (so something like 1979 to 1998?) took it over did not do that well-- I don't recall whether that included holding Citi shares to now or not. However it was a good place to work ;-).
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Russell »

You guys got me curious, so I put together my own spreadsheet to check this thing out. Here's a couple things I found:
  • In rolling 4-year periods between October 1928 and March 2009, the Dow rose 79% of the time. Nonetheless, an investment stuctured like the GS one would have "paid out" only 10% of the time.
  • The average 4yr return on the GS-product over these 918 trials was 2.37% cumulative (versus the floor of 2.0% cumulative).
  • The realized yield for the GS-product over this 80-year period never surpassed 4.5% per year. The best 4yr return would have been 18.5% cumulative (so about 4.3% per annum) over the period from Feb1993 to Feb1997. During this period the Dow itself rose over 100%. The yield on a 5-year treasury in Feb1993 the was 5.37%
  • In every month between 1953 (when my bond data starts) and March 2009, the yield on the 5-year treasury was better than the yield eventually realized on the (4-year) GS-product. Except for once. The GS-thing bought in June2003 would have yielded 2.37%. A 5-year treasury bought at the same time yielded only 2.27%.
Choose whatever you want to compare it against -- historical evidence suggests that this thing is structured for Goldman's advantage, not for yours....
The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945).
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by newbie001 »

Russell wrote:You guys got me curious, so I put together my own spreadsheet to check this thing out. Here's a couple things I found:
  • In rolling 4-year periods between October 1928 and March 2009, the Dow rose 79% of the time. Nonetheless, an investment stuctured like the GS one would have "paid out" only 10% of the time.
  • The average 4yr return on the GS-product over these 918 trials was 2.37% cumulative (versus the floor of 2.0% cumulative).
  • The realized yield for the GS-product over this 80-year period never surpassed 4.5% per year. The best 4yr return would have been 18.5% cumulative (so about 4.3% per annum) over the period from Feb1993 to Feb1997. During this period the Dow itself rose over 100%. The yield on a 5-year treasury in Feb1993 the was 5.37%
  • In every month between 1953 (when my bond data starts) and March 2009, the yield on the 5-year treasury was better than the yield eventually realized on the (4-year) GS-product. Except for once. The GS-thing bought in June2003 would have yielded 2.37%. A 5-year treasury bought at the same time yielded only 2.27%.
Choose whatever you want to compare it against -- historical evidence suggests that this thing is structured for Goldman's advantage, not for yours....
Thanks for taking the time to do that, it's very interesting and a pretty damning indictment of the GS CD. I wonder what 3-year CDs were yielding between 1993 and 1997.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Russell wrote:You guys got me curious, so I put together my own spreadsheet to check this thing out. Here's a couple things I found:
  • In rolling 4-year periods between October 1928 and March 2009, the Dow rose 79% of the time. Nonetheless, an investment stuctured like the GS one would have "paid out" only 10% of the time.
  • The average 4yr return on the GS-product over these 918 trials was 2.37% cumulative (versus the floor of 2.0% cumulative).
  • The realized yield for the GS-product over this 80-year period never surpassed 4.5% per year. The best 4yr return would have been 18.5% cumulative (so about 4.3% per annum) over the period from Feb1993 to Feb1997. During this period the Dow itself rose over 100%. The yield on a 5-year treasury in Feb1993 the was 5.37%
  • In every month between 1953 (when my bond data starts) and March 2009, the yield on the 5-year treasury was better than the yield eventually realized on the (4-year) GS-product. Except for once. The GS-thing bought in June2003 would have yielded 2.37%. A 5-year treasury bought at the same time yielded only 2.27%.
Choose whatever you want to compare it against -- historical evidence suggests that this thing is structured for Goldman's advantage, not for yours....
Russell, have you read the disclosure statements? In other words, are you sure that this thing works exactly like you think that it does?
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by newbie001 »

If anyone feels like tucking in, I think this is the disclosure statement in question:

http://www.fisn.com/resources/pdf/Goldm ... -30-11.pdf

I'm too lazy to read it all, but glancing through it seems like there is indeed no floor on monthly returns but there is a cap, which to be fair looks like it could be as low as 1.5% but also could be as high as 2.0%. From page S-10:

"The supplemental amount that you receive on the stated maturity date is based on the monthly
performance of the index. The decreases and increases in the level of the index from one valuation date to
the next valuation date will be aggregated to determine the supplemental amount. While the increase in the
level of the index is capped at the maximum monthly index return each month, the decrease in the level of
the index is not limited. Thus, even if the level of the index increases during several monthly periods, a
large decline in the level of the index during one monthly period may offset any increases that occurred
during other months and will reduce the supplemental amount you receive on the stated maturity date,
possibly to 2.00% of the face amount of your CDs, the minimum supplemental amount."
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

newbie001 wrote:If anyone feels like tucking in, I think this is the disclosure statement in question:

http://www.fisn.com/resources/pdf/Goldm ... -30-11.pdf

I'm too lazy to read it all, but glancing through it seems like there is indeed no floor on monthly returns but there is a cap, which to be fair looks like it could be as low as 1.5% but also could be as high as 2.0%. From page S-10:

"The supplemental amount that you receive on the stated maturity date is based on the monthly
performance of the index. The decreases and increases in the level of the index from one valuation date to
the next valuation date will be aggregated to determine the supplemental amount. While the increase in the
level of the index is capped at the maximum monthly index return each month, the decrease in the level of
the index is not limited. Thus, even if the level of the index increases during several monthly periods, a
large decline in the level of the index during one monthly period may offset any increases that occurred
during other months and will reduce the supplemental amount you receive on the stated maturity date,
possibly to 2.00% of the face amount of your CDs, the minimum supplemental amount."
Thanks for posting this. I did take the time read this. This appears to be a completely dreadful product compared to other CDs. In fact, it appears to be so bad that I'm surprised the GS would try to sell it. It's a competitive world out there. It seems to me that by trying to sell a product this bad, GS will have too few sales to make this worthwhile and those people who do buy it won't ever want to do business with them again. Maybe I'm missing something, but this appears to be one of the worst CDs that I have ever seen.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by newbie001 »

Brody wrote:
newbie001 wrote:If anyone feels like tucking in, I think this is the disclosure statement in question:

http://www.fisn.com/resources/pdf/Goldm ... -30-11.pdf

I'm too lazy to read it all, but glancing through it seems like there is indeed no floor on monthly returns but there is a cap, which to be fair looks like it could be as low as 1.5% but also could be as high as 2.0%. From page S-10:

"The supplemental amount that you receive on the stated maturity date is based on the monthly
performance of the index. The decreases and increases in the level of the index from one valuation date to
the next valuation date will be aggregated to determine the supplemental amount. While the increase in the
level of the index is capped at the maximum monthly index return each month, the decrease in the level of
the index is not limited. Thus, even if the level of the index increases during several monthly periods, a
large decline in the level of the index during one monthly period may offset any increases that occurred
during other months and will reduce the supplemental amount you receive on the stated maturity date,
possibly to 2.00% of the face amount of your CDs, the minimum supplemental amount."
Thanks for posting this. I did take the time read this. This appears to be a completely dreadful product compared to other CDs. In fact, it appears to be so bad that I'm surprised the GS would try to sell it. It's a competitive world out there. It seems to me that by trying to sell a product this bad, GS will have too few sales to make this worthwhile and those people who do buy it won't ever want to do business with them again. Maybe I'm missing something, but this appears to be one of the worst CDs that I have ever seen.
Yeah, I'm puzzled by who the target buyer of this CD is. My admittedly uninformed impression is that GS deals with institutional investors, and surely such investors are going to avoid this product. I wonder if GS indirectly offers this to Joe Averages through banks and promises the banks a commission of some kind?
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Russell »

Brody wrote:Russell, have you read the disclosure statements? In other words, are you sure that this thing works exactly like you think that it does?
Hi Brody --

The disclosure statements I've seen are not official yet (link), but the formulation they give on the first page is clear. The only variable is exactly where the monthly cap will be set (between 1.5% and 2.0%).
To determine your payment at maturity, on each monthly measurement date, which we refer to as a valuation date (set on the trade date, expected to be the of each month, beginning on _____, 2011 and ending on _____, 2015, subject to adjustment) we will calculate the percentage increase or decrease in the level of the index during each month, subject to the maximum monthly index return. The maximum monthly index return will be set on the trade date and is expected to be between 1.50% and 2.00%.

The monthly index return for any given valuation date will be determined as follows:
  • first, we will subtract the closing level of the index on the immediately preceding valuation date (or the initial index level, which will be set on the trade date, in the case of the initial valuation date) from the closing level of the index on such valuation date.
  • Then, we will divide the result by the closing level of the index on the immediately preceding valuation date (or the initial index level, which will be set on the trade date, in the case of the initial valuation date), and express the resulting fraction
    as a percentage.
  • The monthly index return on each valuation date will equal the lesser of (i) the monthly index return, or (ii) the maximum monthly index return.

On the stated maturity date, for each $1,000 face amount of your CDs you will receive an amount in cash equal to the $1,000 face amount plus the supplemental amount. The supplemental amount will equal the greater of:
  • $1,000 times the sum of the monthly index returns; or
  • $1,000 times the minimum supplemental amount of 2.00%.
This is the same formulation I used in my calculations, although I used the low-end 1.5%/month. As might be expected, things work out a little better with the cap pushed up to 2.0%: an almost 1-in-4 chance of a non-minimum payout, an average yield of a whopping 1.1% per annum (with a max close to 7.0%) -- and they beat the yield on a 5-year treasury nearly 6% of the time.

In my view, it's really the combination of the capping with the summing that causes the problem. The summing alone is a lot like monthly rebalancing and could be an advantage in some zig-zagging markets. For example, if the market drops 20% and then rises 25%, traditional (compounding) investors come out even, but "summing" investors are up 5%. The capping is not much different from selling covered calls every month (as long as you get to pocket the premiums yourself). But in combination, you get trouble -- now, when the market drops 20%, you require 10 straight months of gains just to get back to even....

p.s. For fun, I also ran the numbers with the monthly cap lowered to 1.0%. In that case, the only non-minimum payout in 80 years occured in the mid-nineties, with a best-ever yield of 1.02%. The precise level of that cap is really important -- interesting that that's the piece that hasn't been established yet....
Last edited by Russell on Wed Dec 21, 2011 12:56 pm, edited 1 time in total.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Russell, thanks for doing the work.

Conceptually, I have no qualms with these types of products. This one, though, is a different story and just seems awful.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by DetroitRed »

Brody wrote:
Thanks for posting this. I did take the time read this. This appears to be a completely dreadful product compared to other CDs. In fact, it appears to be so bad that I'm surprised the GS would try to sell it. It's a competitive world out there. It seems to me that by trying to sell a product this bad, GS will have too few sales to make this worthwhile and those people who do buy it won't ever want to do business with them again. Maybe I'm missing something, but this appears to be one of the worst CDs that I have ever seen.
I've seen versions of the Goldman CD disclosure that are over 60 pages long. The CD disclosure from my local credit union is less than a page and written in plain English.

Brody -- you have a much better legal brain than me, I can't make sense of over 80% of what's in the Goldman disclosure, which in my experience always means that they've spent an enormous amount of time making every conceivable angle unfavorable to me. I also hope you're right that no one will buy this. Unfortunately most of the investing public doesn't frequent this board or read financial columnists like Larry.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

There are some disclosures in which one really has to dig to see the problems. I'll at least give GS credit here for making it easy to see that this product is pretty bad. One doesn't have to get past page 1 to see it.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

larryswedroe wrote:As director of research for the Buckingham Family of Financial Services I have been asked to analyze hundreds of structured products over the years. Not once have I seen one that made any sense for investors.
So it was no surprise to see that the new Goldman CD would be bad, but just how bad surprised even me.

http://www.cbsnews.com/8301-505123_162- ... ColumnArea

Best wishes
Larry
Larry, I wanted to go back and give you some recognition. We do certainly have a disagreement with some of the nuances, but in terms of what you said, "but just how bad surprised even me". I agree wholeheartedly. Good work bringing this to everyone's attention.

In my opinion, a more fair comparison than what you did in the article would simply have been to only do the 5%/95% comparison and at the same time assumed a 2% CD rate since that it what someone could get today. Doing it that way, the risk of loss of Principle would be the same (0%), and it would still show how awful this product would be.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Epsilon Delta »

Brody wrote:
And you need to really give up this nonsense about SEC and registration as whether one has to register or not does not impact the risk or expected return of the investment, that is determined by its structure

Larry, you are really missing a major point. If you want to argue that it is the structure that matters, that is fine. However, you then must ask yourself why the structure does not need SEC registration.

It does not need SEC registration because there is no investment risk.
Or perhaps it does not need SEC registration because it takes advantage of a loophole, or it's so complex that SEC thinks it would be hard to defend a ruling in court.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Epsilon Delta »

Brody wrote:Epsilon Delta,

Thanks so much for that link. From my reading of that link, it appears to me that the question of whether the interest is covered is "it depends".

First of all, it depends on exactly how this GS product works. Does somebody have the exact information or are we just guessing at this point?
I agree it depends on how the GS product works. GS does not make it easy to understand (IMHO this is a tip off to run away) but if I understand correctly later market changes can undo the earlier earnings, e.g., if the market is up 1.5% per month for 47 straight months and then drops 70% in the last month you only get the 2% guarantee. So you can't determine the actual return until the end of the term. I think makes them contingent.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Epsilon Delta wrote:
Brody wrote:Epsilon Delta,

Thanks so much for that link. From my reading of that link, it appears to me that the question of whether the interest is covered is "it depends".

First of all, it depends on exactly how this GS product works. Does somebody have the exact information or are we just guessing at this point?
I agree it depends on how the GS product works. GS does not make it easy to understand (IMHO this is a tip off to run away) but if I understand correctly later market changes can undo the earlier earnings, e.g., if the market is up 1.5% per month for 47 straight months and then drops 70% in the last month you only get the 2% guarantee. So you can't determine the actual return until the end of the term. I think makes them contingent.
We have the same understanding. The most that one would get on this product if GS went bankrupt is the guarantee. However, since the guarantee doesn't get paid until the end of the 4 year term, I don't know if even a portion of that would get paid if GS went under before 4 years.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Epsilon Delta »

From the GS disclosure document:
http://www.fisn.com/resources/pdf/Goldm ... -30-11.pdf
The CDs evidence deposit liabilities of Goldman Sachs Bank USA, which are covered, with respect to the face amount only, by federal deposit insurance, up to a maximum limit of $250,000 per individual or entity,
...
In addition, the FDIC has taken the position that the supplemental amount is not insured by the FDIC in most instances.
Face amount and supplemental amount are defined in the disclosure such that all the earnings are supplemental.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Or perhaps it does not need SEC registration because it takes advantage of a loophole, or it's so complex that SEC thinks it would be hard to defend a ruling in court.
I can talk more intelligently on this subject when it comes to insurance products, so allow me to talk about fixed annuities instead of CDs, but conceptually, the point that I'm trying to make is the same.

What does an insurance company do with the money that they bring in? They turn around and invest it. Part of what they invest it in is securities.

This is true whether people are buying products that have a specific interest rate for all years or if the rate floats every year* or if the rate is tied to some index such as the DJIA. Regardless of how a specific product works, these are all fixed products. As such, all of the money is in the general account of the insurance company. An insurance company will hedge their risk differently based upon the mix of products sold.

SEC registration isn't about the insurance company's money. It is about the individual's money. When the money goes into the general account of the insurance company, it is the insurer who is taking the risk. They may make more or less than what is promised to the owner. Regardless of what the insurance company makes, they must pay the owner what is promised. The individual is not taking any investment risk with a fixed product.

If equity indexed products need to be registered products then all products need to be registered products. When one buys an equity indexed product it does not mean that a single dollar is purchasing an equity product. The individual isn't buying an equity (thus no registration) and the insurance company may not be buying an equity product. It is simply a formula to determine how interest is credited.

One who buys a fixed product has no equity risk is a creditor of the insurance company.

Variable products, on the other hand, need to be registered. With these products, the money is not in the general account of the insurance company. The money is in a separate account and belongs to the owner. These products carry investment risk. The individual is not a creditor of the insurance company. If the insurance company goes bust, the person's money is safe.

Let's keep this super simple:
Registered product= Investment risk and money in separate account.
Non-registered product= no investment risk and money in general account.

Equity indexed products have no investment risk and the money is in the general account, thus they don't need registration.

This is why I personally prefer the term "fixed index annuity/CD" as opposed to "equity index annuity/CD". It makes it more clear that these products are fixed products and not equities.

As we see with the GS CD, even though it is using a specific index, it is quite obvious that the summing and caps combined mean that it won't even track the index being used.

*Annuities in which the rate floats every year are usually tied to something, but the actual rate is determined by the insurance company. They usually will have a minimum.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Summing up this product:
1)It is a CD.
2)It is a 4 year product.
3)The guarantee is 2%. It is not 2% per year. It is a total of 2%.
4)To the extent that past stock market performance isn't completely meaningless, the way that they cap the gains but not the losses and how they sum these up mean that getting the minimum is a great likelihood and getting substantially more is not a realistic expectation.
5) There are no earnings on this product until the end of the 4th year. Therefore, FDIC insurance probably only covers the principal.
6)This product may be illiquid. One may not be able to get out of the product.

The positives of this product are:
1)....help...I want to be fair to it, but I can't think of any circumstance how even with this low interest rate environment how one wouldn't be better off with a traditional CD paying 2%.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by ilmartello »

maybe some people are nitpicking about the definitions or terms larry is using, but is anyone seriously suggesting this structured product is a good investment for anyone?
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by gulliver »

Looks to me that Goldman has set this up as a hedged instrument and guess who pays for the hedge?

Any retail investor who thinks they're going to get a better trade with Goldman than PenFed, etc. needs to go back and hit the books.

Product would make more sense if, instead of linking it to DJI, they linked it to GS!
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

gulliver wrote:Looks to me that Goldman has set this up as a hedged instrument and guess who pays for the hedge?

Any retail investor who thinks they're going to get a better trade with Goldman than PenFed, etc. needs to go back and hit the books.

Product would make more sense if, instead of linking it to DJI, they linked it to GS!

With how this product is structured, there is very little risk to Goldman. In fact, it wouldn't surprise me if they didn't bother to hedge it all.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by yobria »

ilmartello wrote:maybe some people are nitpicking about the definitions or terms larry is using, but is anyone seriously suggesting this structured product is a good investment for anyone?
Looking at the details others have been kind enough to post, especially the gain/loss asymmetry, it doesn't look appealing.

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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Fallible »

yobria wrote:
ilmartello wrote:maybe some people are nitpicking about the definitions or terms larry is using, but is anyone seriously suggesting this structured product is a good investment for anyone?
Looking at the details others have been kind enough to post, especially the gain/loss asymmetry, it doesn't look appealing.

Nick
As Larry concluded in his column: "The analysis shows that this product was designed to be sold, and not bought. However, we don't really need to do this analysis to know whether the product is in investors' best interests. It's the job of the issuer's CFO to raise capital at the lowest possible cost -- not to provide investors with higher returns. These instruments are very complex, and the complexity isn't designed in the investor's favor. We have looked at many structured products and have yet to find one that benefits investors rather than issuers."

Thank you, Larry!
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by yobria »

Fallible wrote:
yobria wrote:
ilmartello wrote:maybe some people are nitpicking about the definitions or terms larry is using, but is anyone seriously suggesting this structured product is a good investment for anyone?
Looking at the details others have been kind enough to post, especially the gain/loss asymmetry, it doesn't look appealing.

Nick
As Larry concluded in his column: "The analysis shows that this product was designed to be sold, and not bought. However, we don't really need to do this analysis to know whether the product is in investors' best interests. It's the job of the issuer's CFO to raise capital at the lowest possible cost -- not to provide investors with higher returns.
Which of course is true for every other product and service in our economy. Welcome to capitalism. And, personally, I did need to do the analysis to determine whether or not the product is a good one. It is possible for both buyer and seller to win in a financial transaction.

Nick
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by baw703916 »

One interesting thing about market linked products, apart from the fact that they tend to be a very expensive way to buy options, is just how much upside you have to give up to have zero possibility of a loss.

That's obviously the selling point: get a higher return if the market goes up, with no possibility of loss!

Even if you waived off this particular offering, or for that matter any such product offered commercially, and put together your own with a regular CD and a call option spread, you still have sacrificed a huge amount of upside.

I think the point here is just how difficult--and expensive--it is to reduce risk all the way to zero. For the same reason that car insurance becomes much more affordable if you have a $500 deductable. Even with a 80% in a CD and 20% in the S&P 500 index, you would have lost a little principal in 2008 (only 3.6% if the CD interest rate was 4%). For accepting that one loss, you wind up substantially ahead (relative to a CD + call spread) every other year in recent memory.

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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Epsilon Delta »

Brody wrote:
Or perhaps it does not need SEC registration because it takes advantage of a loophole, or it's so complex that SEC thinks it would be hard to defend a ruling in court.
This is true whether people are buying products that have a specific interest rate for all years or if the rate floats every year* or if the rate is tied to some index such as the DJIA. Regardless of how a specific product works, these are all fixed products.
...
let's keep this super simple:
Registered product= Investment risk and money in separate account.
Non-registered product= no investment risk and money in general account.
...
Thank you for the lengthy explanation.

If I understand you correctly you are saying that an insurance company could set up a synthetic ETF following the S&P 500 and this would be a fixed product and would not require registration. Further because it is non-registered product it has no investment risk. This is a very strange definition of "no investment risk" and if it is in fact what is used to determine if SEC registration is required then SEC registration is a red herring.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by Brody »

Thank you for the lengthy explanation.

If I understand you correctly you are saying that an insurance company could set up a synthetic ETF following the S&P 500 and this would be a fixed product and would not require registration. Further because it is non-registered product it has no investment risk. This is a very strange definition of "no investment risk" and if it is in fact what is used to determine if SEC registration is required then SEC registration is a red herring.Epsilon Delta
I'm not saying that at all. If it was a synthetic ETF, it would involve risk to the investor. It would then need to be registered.
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Re: Goldman Sachs wins my Dubious Distinction Award

Post by larryswedroe »

Few last thoughts for all

First, despite Nick's claim there is never a need to do analysis on structured products as I stated. I have looked at HUNDREDS and never once found anyone close to being good for buyer.
I explained why this is always true. You can market a simple straightforward product cheaply and if it has the lowest yield that is what you will do as the CFO. Now your job as the CFO is to raise capital at the lowest price. So to get even lower cost debt you concoct complex securities that have much higher costs but consumers cannot see them clearly, they don't have knowledge of the risks and costs. So you get to exploit them. This is a disgrace and despite my being a libertarian by nature, these should be outlawed, period. The only reason any sophisticated institution offers such products is because after hedging the risks they get lower funding. That is why ALL ETNS for example are created. Lower funding costs, and no one should ever buy an ETN IMO.

Second, what investors don't know is just how volatile stocks are. In fact if you eliminate the best 100 months in last 100 years the average month now has zero return. So the cap on the upside is deadly to these type securities since they don't cap the downside (we all know that stocks have big fat tails)

Third, it is NECESSARY to show that the same objectives can be accomplished in superior ways, that is why I showed an alternative

Best
Larry
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