Suckers still exist

Matt Levine’s latest newsletter describes a sucker of a trade:


  1. You give Citigroup Inc. $1,000, when’s stock is at $1,339.60.
  2. At the end of each quarter for the next three years, Citi looks at Amazon’s stock price. If it’s at or below $1,339.60, Citi sends you $25 and the trade continues. If it’s above $1,339.60, Citi sends you back your $1,000 and the trade is over.
  3. At the end of the three years, Citi looks at Amazon’s stock price. If it’s above $1,004.70 (75 percent of the initial stock price), then Citi sends you $1,025 and the trade is over. But if it’s below $1,004.70, you eat the full amount of the loss: For instance, if Amazon’s stock price is $803.80 (60 percent of the initial stock price), then you lose 40 percent of your money, and get back only $600. Citi keeps the rest. (You get to keep all the premiums, though.)

Anyone with half a brain should know that this is not a great trade.

For starters, it gives the client (usually a hedge fund or a pension fund or someone who represents rich guys) a small limited upside (of 10% per year for three years), while giving unlimited downside if Amazon lost over 25% in 3 years.

Then, the trade has a “knock out” (gets unwound with Citigroup paying back the client the principal) clause, with the strike price of the knockout being exactly the Amazon share price on the day the contract came into force. And given that Amazon has been on a strong bull run for a while now, it seems like a strange price at which to put a knock out clause. In other words, there is a high probability that the trade gets “knocked out” soon after it comes into existence, with the client having paid up all the transaction costs (3.5% of the principal in fees).

Despite this being such a shitty deal, Levine reports that Citigroup sold $16.3 million worth of these “notes”. While that is not a large amount, it is significant that nearly ten years after the financial crisis, there are still suckers out there, whom clever salespersons in investment banks can con into buying such shitty notes. It seems institutional memory is short (or these clients are located in states in the US where marijuana is legal).

I mean, who even buys structured notes nowadays?

PS: Speaking of suckers, I recently got to know of the existence of a school in Mumbai named “Our Lady of Perpetual Succour“. Splendid.