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Subprime crisis: the fallout in Taiwan

Structured Note killer: an exclusive confession from an investment banker

A group of mathematics geniuses from international investment banker dealing rooms have created, out of thin air, an investment product---structured notes; while these professionals enjoyed million dollar salaries [note: article says over-ten million NT$ salaries], their investors ended up with broken homes and families. All along the financial advisors repeatedly promised "guaranty of principal, guaranty of principal", that the principal would be repaid as promised. This type of "wealth management" rings a degree of sophistication, yet the end result turned out to be the total destruction of investor wealth.

by Wu Tsio Chen, Wen Chien Ton and Wang Tsi Tien

For the first time ever in our country [note: Taiwan], a foreign investment banking executive has steppd forward to reveal what's the behind the structured note black curtain.

"The broker's job is to make a living, regardless of what happens to their investor's investment", said Ms Ho, former vice president of J.P.Morgan Chase Sales & Trading group. Creating structured note is the exclusive domain of genius among geniuses. As long as a client has an account, the game is to continuously churn his/her account until the game is over. [note: literal translation is to continue offer the client financial toys until there are no more toys to play with"

The professionals that she is referring to, sales & trading room structurers and bankers, purchase multi-million dollars brand-name watches and lavious mansions. While typical base salaries for these bankers start around $250k USD, compensations over a million is commonplace. It is estimated that investors in our country [note: Taiwan], have poured as much as $36.8 billion USD [Note: $1200 billion NT @ 1USD = 32.59 NT exchange rate] into structured notes investments.

The last three or four years have been a diabolical world. A perfect money-pit investment plan, led by a consortium of foreign investment bankers, local banking executives, financial advisors and planners, with willing participation from investors, has created a structured note farce. The play, with devils as directors, greed as screenplay, was funded by investors who ended up with broken homes and families. While the show was playing out, the banks were feeding investors mouthful of these "venoms". [to be continued]

For those of you who read Chinese, the excerpt of this original article (from Taiwan's Business Weekly magazine) can be found here

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I will translate the remainder of the article when I get a chance.
Ms. Ho, who left J.P.Morgan four years ago, still goes through daily life with a sense of guilt. So who were the ones responsible for this multi-layer scheme? She elaborated further:

"Structured note is a product designed by investment banks; I [note: meaning the investment banks] sell it to the local (regional) banks, which in turn offer it to the investors. So the most regional banks can make out of this transation is merely the broker fee. The real 'meat' is held by the investment banks. So the reasons those bankers can command such a high salary is because of their ability to design these kinds of products [note: the author want to say 'crap']"

"Our group [note: structured note group], with just eight people, accounted for a third of our bank's profits. Only the brightest and willing to study hard get into this kind of sales and trading groups; most are devilish mathematical geniuses [note: quants]. They were the ones smart enough to devise these types of products (structured notes). So in reality, these were explicitly a creation. As result investment bankers eagerly sought out these math whizzes. It is akin to pimping: the bank nurture them and make note structurers out of these school elite."

"The real meaning of 'create' is to 'make things out of thin air'. This process is mathematically very intensive; coupled with financial engineering, the two come together (a match) to become one. The 'moving the inventory' [note: sale of structured notes] was greatly facilitates by the force of globalization [note: a perfect storm]"

"To be honest, this has nothing to do with satisfying human needs. So at the end [note: right before she left JPMorgan] I felt that I was just engaging in the business of 'stirring the pot'; the world would truly be better off without us. I couldn't go on for any longer. [she laughed out loud]"

"People like us are really devastatingly good [note: a typical Chinese expression meaning very capable people]; investors have no ability to crunch the numbers, so if they were able to generate 7% or 8% return on investment, they would be quite satisfied. If we [note: the bankers] can structure a product that yields 30%, sell it to investor for a mere 7% or 8%, we would end up pocketing a tidy profit of 23%"

"Banks can only profit from transation fees, so are those in sales. The only reason those of us in the group were able to command this high of compensation is because nobody understood what we were doing; because what we were doing have exceeded the norm. Doing this for long is unethical. According to these people [note: those in the creation of these products], because I am smarter than you, I am more 'devastatingly better' [note: again a Chinese expression] than you, by that logic, you are destined to be chopped on by me [note: meaning to be taken advantage of]. So this is a 'man eats man' [note: dog eats dog] kind of game, those playing this sort of game are not inclined show any kind of mercy, or compassion [she laughed out loud again]"

[to be continued]
"The investment bank CEOs are pressured into continuously adding shareholder's value. Concerned with their young stars jumping ships, these executives spare no expenses in trying to cuddle them. The bankers ended up being pampered in every way possible: limosines, five start restaurantes and hotels, flying business class, first class. Personally, when I was out on business trips, I never had a cap put on my credit cards expenses. To be honest, after getting used to the high life for so long, it is really hard to leave."

"When you are pampered to that degree, how can you ever leave for a $360k NT (about $10k USD p.a.) job?"

"Things in Hong Kong, Singapre or New York were even more out of control. Talk about living the life of rich and famous! I have heard that as soon as bonuses were announced, the head of the trading floor would gather the troops and lead them to luxury item stores. I heard some morons spent twenty even over thirty thousand dollars in one single watch. There were even people heading out to purchase a yacht on the spot. It was totally a game of upmanship!"

"Investment bankers, being so used to this kind of high life, would never even entertain the thought of leaving. This is was highly addictive, like getting fed some kind of drug!"

"That's right, this life style keep you hooked, make you beg for more. From a psychological point of view, one's behavior can lead to changes in one's psyche. When you are accustomed to doing these sort of things[note: make huge amount of money for your bank, in turn for yourself], you are more apt to change your values. You start rationalizing your actions in order to keep doing what you have been doing."

"Listen, I can't even predict what will happen to my company's stock, so how can average investors in Taiwan even be knowledgeable enough to trade bonds based on certain North Brent Sea crude oil index? how can one predict what that index will be in a few years? if you do you are honestly "devastatingly better" than those investment bank analysts."

"It is seldom that you hear someone say, I am making all this money but I am feeling very guilty, so I better stop. So as long greed exists, there is gonna be inclination to squeeze as much out of this golden goose as humanly possible. It is like drilling for oil, one only stop when the well stop gushing oil. Things, the way they were playing out, would eventually head towards a cliff. Truth is people never know when to put on the brake. Even if one intends to do so, his/her boss would push one to keep going. So if it is your boss who wants to stop, his/her colleagues would not let him/her. It is like everyone tumbling down the hill together."
[to be continued]