My Retirement Plan At 35

[CityFarmer]

I still recall that one of the hidden clause with the Lehman Mini-bonds was that if one bank fails, the note is taken as default for ALL banks.
That was why many people was shocked that even though it was only Lehman and Bear Stearns that went bankrupt, the product is considered as zero dollars.

It was a "first to default" structure. If people had read the prospectuses the minibonds would never have sold because:

1. If they didn't understand it they shouldn't have bought it;
2. If they understood it they wouldn't have bought it.

Basically, the minibonds were toxic products that should not have been created, nor sold to anybody at all. But enough salesmen didn't care, and enough buyers didn't think, that large quantities of mini-bonds were sold.

What were the minibonds? They were insurance products - buyers put up collateral (their capital) in exchange for receiving insurance premiums. When the reference entity in question (Lehman) blew up, the collateral was seized to pay the insurance claims. That's what was really insidious about the whole affair. People thought they were buying a bond - that they were lending someone money, and that someone was paying them interest. In fact, they were selling insurance. Their money wasn't going anywhere - it was kept as collateral, and the money they got was the insurance premiums someone else was paying to protect against default. When the default did occur the collateral was given to the buyer of the insurance. Hence, total loss for the minibond buyer.

ELNs work in roughly the same way. The customer puts up money as collateral. In exchange he receives an insurance premium paid by someone else who is bearish on a stock (the equity in the ELN). If the stock crashes, the money is swapped for the stock. In effect, the insurance buyer has transferred his loss to the ELN customer. Of course, nobody really wants to be an insurer - people recognize their lack of expertise in pricing premiums. So the banks tell the clients they are earning "interest" instead of explaining to them that they are selling insurance to someone else who thinks the stock may crash.

Legal? Yes. Ethical? You decide.

I think twice when i had different view from guru like d.o.g. But i hold-on to my view on ELN

Misused of a tool, should not reach a conclusion that the tool is lousy or even dangerous.

I believe no-one doubt that insurance is an excellence service for trading risk with a premium. Life insurance, if use wisely, will allow us to manage life's risk with great comfort. Travel insurance, if use wisely, will allow us to travel with ease of mind. Similarly for ELN, if use wisely, will allow us to "speculate" with sound sleep at night

Having say so, i am against to use ELN as an investment alone. It should be a tool to facilitate an investment strategy. But i respects each choice taken by individual investor.

Mini-bond is bad due to its mis-representation as "bond", rather than as an insurance in nature

[funman168]

I was wondering, if I hv $100k, is it better to do ELN trading or just stock trading?
Any opinions?

[corydorus]

If i read all above, it sounds to me it works against retailers. We basically encourage institutions to take very high risk protected with retailer funds. If is not blown out, the retailer only get a small premium of the total gains. If it does blowout, retailer lose all....

Also there is risk it can be easily rigged from both ends by driving down the stocks.

[natnavi]

At the end of the day, ELN looks like a win-win situation for the banks and hedge funds only. The bank's retailers are the only losers when the sh*t hits the fan. ELN is essentially a product the bank uses to transfer all the risks the bank has borne and a small portion of the profit the bank has earned to their retailers. (I am assuming that the % the banks pay their clients is only a small fraction of the total amount the hedge funds are paying them. It would be good if someone has the actual figures to verify this assumption)

At the end of the day, the retailers that the banks are suppose to service, is being exploited by the banks.

I do not think this can be help because in such scenarios, the bank has two different sets of clients - the hedge funds and the retailers. If I was a bank owner myself, I would want to protect the client that rewards me the most.

[pianist]

1/3 corporate bonds,1/3 AUD Fixed deposit, 1/3 SGP dividend stocks.
Need to amassed enuf experience, knowledge & confidence to be successful.

hi funman, just curious, when u said need to amassed enuf experience, knowledge & confidence to be successful, are u refering to success in one's career or one personal investment?

[CityFarmer]

At the end of the day, ELN looks like a win-win situation for the banks and hedge funds only. The bank's retailers are the only losers when the sh*t hits the fan. ELN is essentially a product the bank uses to transfer all the risks the bank has borne and a small portion of the profit the bank has earned to their retailers. (I am assuming that the % the banks pay their clients is only a small fraction of the total amount the hedge funds are paying them. It would be good if someone has the actual figures to verify this assumption)

At the end of the day, the retailers that the banks are suppose to service, is being exploited by the banks.

I do not think this can be help because in such scenarios, the bank has two different sets of clients - the hedge funds and the retailers. If I was a bank owner myself, I would want to protect the client that rewards me the most.

Base on similar logic, insurance company is the only loser when "the sh*t hits the fan" (e.g. disaster occur). So insurance service is lousy biz (?)

Base on similar logic, between depositors and loan customers, bank will protect loan customers more since reward is higher. So it is wrong to deposit $ in bank (?)

[camelking]

I was wondering, if I hv $100k, is it better to do ELN trading or just stock trading?
Any opinions?

Understand from bankers of my company, only high net-worth clients/institutions under private banking are offered. Minimum investment unit is USD50k each.

Depending on your view of market, you can either receive/pay coupon.

Suggest that you get a few quotes before committing. It is a very competitive market out there and yes, you can negotiate the yield, duration, strike price, knock off price and interest spread if you are leveraging.

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If i read all above, it sounds to me it works against retailers. We basically encourage institutions to take very high risk protected with retailer funds. If is not blown out, the retailer only get a small premium of the total gains. If it does blowout, retailer lose all....

Also there is risk it can be easily rigged from both ends by driving down the stocks.

You can choose the other end of the deal if you so wish

Why should banks rig the stocks when they have no risks at all ?(assuming that it is possible to rig the stock price of citibank, Morgan stanley and etc on any given trading day)

[yeokiwi]

Insurance is a good business only if you can dictate the terms and conditions.
Retail investors are normally at the receiving ends when the products are conceived.
Same with insurance companies' products.

I do not mind to be the insurer if I can dictate the t&c.

[CityFarmer]

Insurance is a good business only if you can dictate the terms and conditions.
Retail investors are normally at the receiving ends when the products are conceived.
Same with insurance companies' products.

I do not mind to be the insurer if I can dictate the t&c.

The view is valid only when insurance biz is monopolized and able to set t&c at will.

[greypiggi]

At the end of the day, ELN looks like a win-win situation for the banks and hedge funds only. The bank's retailers are the only losers when the sh*t hits the fan. ELN is essentially a product the bank uses to transfer all the risks the bank has borne and a small portion of the profit the bank has earned to their retailers. (I am assuming that the % the banks pay their clients is only a small fraction of the total amount the hedge funds are paying them. It would be good if someone has the actual figures to verify this assumption)

At the end of the day, the retailers that the banks are suppose to service, is being exploited by the banks.

I do not think this can be help because in such scenarios, the bank has two different sets of clients - the hedge funds and the retailers. If I was a bank owner myself, I would want to protect the client that rewards me the most.

Not sure if this helps but I have asked my banker before and as told each eln the distributing private bank makes about 0.3 to 0.5% as their fee.

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I was wondering, if I hv $100k, is it better to do ELN trading or just stock trading?
Any opinions?

If 100k is your total speculative portfolio, cannot do eln. Per pop is 50k and usually people do 100k and up. If 100k is your total investable portfolio for sure do not touch eln! Most of the time if you do 50k or 100k the bank needs to pair you up with other amounts to make the trade.

My feel is that you need at least 1m as your tradable speculative portfolio to touch eln. So investable net worth at least 5m min.... And that assumes high risk of 20% or 10% with leverage allocation to speculation...