blogger-outrageCry me a river: on Seekingalpha you’ll currently find various posts on the evils of so called reverse convertible bonds. Felix Salmon, ever zealous and spear-heading the movement, wants to outright ban them. Yes, just like he wanted to wipe out stockholders of all them insolvent banks a few months ago (and don’t forget, the bondholders too).

Well, now he has discovered a new evil product that had the audacity to lose their investors money last year: “Reverse convertibles” (say it out loud like Satan would). Good old Felix. Either he doesn’t know his finance 101, or he just wants to feign outrage for publicity’s sake, as he usually does.

What is he upset about? A bundle of things. Let me address his major points.

1. They are called bonds, but have equity-like downside. That is misleading.

Well, you know, individual corporate bonds also have equity-like downside when the issuer goes bankrupt. And as we discovered over the last few years, even houses have equity-like downside. Should we ban houses too?

2. They are sold to clueless investors, even though they have such downside.

Investors always pretend to be clueless when their investments go sour. And then they start crying, run to Mommy and try to get their money back by suing and complaining. They do it with houses by just walking away, they do it with stocks (”oh, our financial advisor never disclosed that equities can lose 50 % in one year”), and now they do it with reverse convertibles.

3. They have excessive fees

So do a lot of products, including mortgages, appraisals, refinancings, etc. Let’s ban all of them.

4. They are much too complicated for retail investors (similar to 2)

That is true, but you know, finance is complicated. That’s what you pay your financial  advisor for: that he preselects an investment suitable for you, based on your individual risk profile. Does this mean that he should be omniscient and be able to avoid everything that could potentially lose money? I wish. If that was possible I’d outsource all my own investments to a guy who can do that.

Listen Felix: if these investments were sold as something else than what they are, then you should go after the prospectus or the FA. Banning the product is just short-breathed populism, something that you unfortunately exhibit in many of your posts (which always, always go WITH the crowd, never against it).

What do you want? Treat the consumer like an idiot? Then you should ban a TON of stuff, not just reverse convertibles. Maybe you should even ban children then: just too complicated, risky and work intensive for the average consumer: “Who knew these little guys would be so much work? Nobody told me! And the costs? Food, clothes, toys…Sheesh”

And who is going to ban all these products? The government that you hate on in most of your posts? I guess. Is there anything left that you actually like, dude? Does anybody ever do anything RIGHT according to you?

Fact is: reverse convertibles are an interesting product, but they do have their up- and downsides, just like everything in life. It goes without saying that their risks should be adequately disclosed. But banning them? That’s just stupid. Before you call for a ban, why don’t you check how they do as a group over the long run, instead of just looking at a not-so-random sample of 1 client who lost money last year? How ridiculous.