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Surprise! You invested in credit swaps.

Now regular investors can lose it all just like the pros


 

Surprise

The fallout from the financial meltdown is getting stranger and stranger. Almost everyone with an RRSP has already been scorched by falling stocks, but it turns out that thousands of Canadians have, in some cases inadvertently, put their savings directly into complex financial instruments called credit default swaps. Now they could lose every penny.

Jim Cougle, a 59-year-old field manager in Fredericton, N.B., was one such investor. He says his broker approached him with what looked like a conservative investment a few years ago to supplement his retirement income. He thought he was investing directly in a basket of top-rated corporate bonds, and as he says, “what could be safer than that?”

But when the financial crisis hit, he started getting letters warning he could lose all his money. Eventually, he was “flabbergasted” to learn that his investment, called ROC Pref III Corp., essentially consisted of about 125 credit default swaps on corporate bonds. The problem is, some of those bonds were issued by firms such as Lehman Brothers, Fannie Mae and Freddie Mac—which had either gone bankrupt, or were close to it.

Neil Murdoch, president of Connor, Clark & Lunn Capital Markets, which put together Cougle’s investment, says several other firms, including SentrySelect (Global DiSCS Trust) and National Bank (Global DIGIT), offered similar products. All were initially rated as being safe, says Murdoch, but “two things were tough to predict: one was the leveraged buyout craze, and the second was this huge, global meltdown.” He adds that Cougle’s investment could still recover before it matures, and that it says on the first page of his investment’s prospectus that “holders may suffer a loss of their entire investment.”

Cougle maintains that he didn’t realize what he was getting into and he wants a bail-out. In the meantime, though, he’s learned two important lessons: first, there really is no such thing as a safe investment—and second, never buy anything unless you understand exactly what you’re getting into.


 
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Surprise! You invested in credit swaps.

  1. I read this with a great deal of interest, as my age and circumstance are almost identical to those of Mr. Cougle. I learned yesterday that ROC III has suspended the next three dividend payments in order to purchase one additional credit default, which would allow for five more failures before it fails. With the degree of exposure this fund has, it’s chance of success appears to be remote, as suggested by it’s current trading price. Like Mr. Cougle, I was assured of the high rating and degree of safety in this investment by my investment agent, and I am most interested in persuing restitution should this fund fail.

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