Easy Money

For those of you frustrated by the stratospheric .025 % CD or Money Market returns available to the Average Joe courtesy of the Bernak, da Wall Street boyz have got a sure-fire path to higher returns. For them, that is.

Reverse Convertibles are short-term bonds generally marketed to individuals that convert into stock if a company’s share price plummets.
Banks sold more than $6 billion of bonds linked to the performance of stocks last year, promising returns of as much as 64 percent at a time when interest rates were at historic lows.

Instead of reaping such extraordinary gains, reverse convertibles, as the products are known, lost 1 percent on average.

Those were the lucky ones. Here's some of the unlucky ones: Click on the charts for a larger picture.

Royal Bank of Scotland Group Plc sold $1.15 million in three-month notes tied to Eastman Kodak Co. on June 10 that paid 24 percent annualized interest. That’s 24 times the average rate on one-year certificates of deposit.
Buyers couldn’t lose money unless shares of the camera maker fell to below $3.54 from $5.06. Kodak dropped to $3.50 on Aug. 31 in New York trading. RBS converted the bonds into stock and investors lost about 18 percent even with the high interest rate.

Sheeeiitt. Can you believe it? 3.54 was the stop, and it made it to 3.49 for one day only, kicking all those poor investors in the balls and converting their bonds into Kodak shares at multi- year lows. It's at 5.74 now. Curse the luck!

On May 11, JPMorgan sold $800,000 of reverse convertibles linked to TiVo Inc. that paid 64 percent a year in interest. 64%? Woo-Hoo! I'm gonna be rich!


Three days later, TIVO dropped 42 percent after an adverse court ruling. Investors ended up losing 42 percent, including interest. The bank charged 1.75 percent in commission on the two-month notes.

Now, that's just darned unlucky in my opinion. Want to see how unlucky? Check out the chart....
Hmmm. TIVO's puttering around $10 per share, then somebody decides it's worth A LOT more on March 4th. JP Morgan sells 800K worth of Reverse Convertibles in May. Then darned if we don't get the old adverse court ruling and it's right back down again.



Curious. No one thought TIVO was worth more than $12 a share for 6 years. Then in one day it goes to $18. JPM sells some convertibles, then a 42% gap-down three days later. Now it's back to the old range. Weird.

Word to the wise, if anyone promises 64% returns, even someone as forthright and trustworthy as JP Morgan Chase, you might want to think twice. Mom and Pop traders can't gap stocks 40% in both directions, or manipulate prices just far enough to hit paydirt. The largest Hedge Fund/Too Big To Fail Casinos can though. And they do. Every day. When you see those 2010 Wall Street bonuses roll in at all-time highs try not to be the one whose paying them.