Firmly established in Wall Street’s rich history are financial products which are sold as “safe” that turn out to carry risk reminiscent of a slot machine gamble.
We’ve seen this sinister phenomenon with collateralized debt obligations (CDOs) that were supposedly backed by the collateral of “rock solid assets” behind them. We’ve also witnessed the same sales pitch with auction rate securities (ARS), which offered a better yield than money market funds, but with the same level of risk, allegedly. In both cases, the money invested in CDOs and ARS got zapped. Is this about happen to bank sponsored exchange-traded notes (ETNs)?
ETNs, unlike traditional ETFs, are debt obligations that rely on the financial soundness of the banking institutions backing them. And when the financial liquidity or solvency of an ETN’s sponsor comes into question, the note’s performance can track the bank’s corporate debt instead of the note’s intended benchmark. Even worse, the note can become worthless if the financial institution declares bankruptcy. Why is this important?
From the very beginning of Europe’s crisis circa late 2009, the continent’s leading voices (from Europe’s Central Bank to its heads of state) have been consistent in one regard: They’ve continually underestimated the severity of the crisis each step of the way. They were wrong about Greece, Ireland and Portugal not needing bailouts — and they were badly wrong on the actual size of the bailout required. Is there any reason to believe they’ll be wrong about the alleged soundness of Europe’s banking system?