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Biting the Hand That Feeds You?



Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this email with hopes that it adds balance to your process.

Professor Succo-

Would it be incorrect to say that you never priced any issues or made statements to their payoff when you were on the sell-side as mentioned in your last mailbag? In addition, you are certainly taking advantage of the low-volatility sellers which are out there aren't you ?



While on the sell-side I traded structured products such as notes that retail clients invested in and which were priced 'through the market," but I did not represent retail clients or advise them as to whether or not that product was good or not. There is a distinction.

That being said, I began to understand the personal implications of my career on the sell-side in my later years. I began to feel a responsibility toward the markets and individuals that trade the markets and that conflicted with "what I was doing."

As a result of these changes, I gave a speech in April 1998 at Grant's symposium that divulged much of what went on in derivatives, specifically the problems I saw with Long Term Capital Management. I was fired for that speech by the CEO of Lehman.

This does not exonerate me from my personal gain at the expense of others, but it shows at least some of the growing process I have gone through.

I did not condemn any individual in pricing this piece of paper for I know first hand the pressure of performance and making money on the sell-side. I am empathetic of the individuals that work in a politicized system.

So now I write for Minyanville where I have an opportunity to expose the way things work and a responsibility to tell it as I see it. I did not mean to sound "holier than thou" in my explanation, but that does not change the fact that investors are receiving prices through the market, although some will argue that is o.k. since these products would not be offered otherwise and buyer beware.

The real problem with this specific "note" that we used as an example is the representation that the investor has a 20% "cushion." That is absolutely untrue. If MRK stock trades down 20% for one day, the investor does have a 20% loss and is exposed to 100% of the downside from there on in. The one caveat that if the stock only trades down 19% and the investor therefore never has downside exposure of that 19% does not substantiate the issuer's claim. We never represented products like this.

As far as "taking advantage of the low volatility" now, it is completely different. I am paying market prices where these notes are being priced 50% through market prices. In these cases the market is being "hidden" from investors.

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