The Crisis of NSEL that has brought Financial Technologies crashing 80% is all because of a product that seems to have been actively advertised as a “safe” investment. Here’s a video from May 2012 showing you how brokers pushed this product – in this instance, it’s Ventura Securities selling it to their customers. (HT @alphaideas)
In case they ever take the video down, here are the salient points in images. First, look at the juicy yields they sell:
This is basically the return of doing a buy and sell leg on a T+3 and T+25 contract on the same day, in the NSEL. Here’s the calculation:
(Click for large image. Excuse the graininess please)
And then, here’s the brilliant part of the presentation:
We will soon know whether it was 100% safe or 0% safe.
Folks, there is nothing you could have done to have foreseen this crisis, unless you knew the insider story of how the whole thing was a ponzi borrowing scheme. Some people had given their commodities as collateral, and took long term funds through this mechanism, hoping to rollover contracts like this forever. When the buyers were spooked by the government regulation, they stopped buying – and that whoosh sound is the game of cards collapsing very fast.
Make no mistake, the government did not create this problem. If the contracts were designed to actually unwind (that is, the borrower side would return the full money and not expect to roll over, which is how a market should always operate), there wouldn’t be a problem.
Everything that seems 100% risk free will work beautifully until that one day when there is 100% risk.