Editor's letter

Distributors should rely on the value of a capital guarantee, worry a little less about whether they will get repaid and worry a little more about how to make a decent return. Being safe and sound in structured products used to mean arranging a capital guarantee. But not any more, it seems. The concern that distributors are sharing with all those willing to listen is that they had not realised that principal protection does not cover their investment should the issuer go bankrupt. To a community that was taken aback last year by the news - to them, at least - that bonds don't necessarily get repaid, it has been a further lesson in the unfortunate offshoots of risk.

Capital protection does not work unless the issuer remains solvent. Recourse for anyone losing money as a result of a bank going to the wall is possible only if the funds are placed in a deposit account, as it is only under those circumstances that governments tend to guarantee a return of funds. This leaves structured products high and dry should a bank go under.

All very clear, you might say. So it is hard to understand why the information was seemingly so obscure to investors.

Bear Stearns' plight was the catalyst for the latest trip back to reality, and it is this that has led investors to badger distributors about any issuer rated less than double A with a raft of questions about credit quality. The responses from single-A or split-rated banks to these concerns are of a calming nature, with any opportunity to explain the pricing benefits of dealing with such a bank laid on the table as quickly as possible.

It seems distributors are asking the wrong questions. While they should be busy with thoughts of how to play volatility or how to invest in still-effervescent emerging markets, they are fretting about something rather pointless. A bank left to go bankrupt? It didn't happen in the UK when Northern Rock hit the skids, it didn't happen in France when SG stumbled across massive fraud, it didn't happen in Germany when IKB was hit by subprime losses and state-owned banks tripped up over their bad debts. And it didn't happen when Bear Stearns wilted.

While the possibility of a government allowing one of its banks to go under remains so remote, distributors should probably rely on the value of a capital guarantee, worry a little less about whether they will get repaid and worry a little more about how to make a decent return.

Richard Jory

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