Voltron says: Lehman sold “principal protected notes” but investors has no protection at all, in fact, Lehman basically just took their money.
Pepper: The concept of a Principal Protected Note--the reality of one is different than the name implies. A lot are principal protected only in certain situations. A lot of times, it takes quite awhile to get your principal back. If you don't hit a certain index level, you have to double up to get your principal back. Investors see it as, "I get all my capital if the market goes down," but it's not necessarily like that. Many wealthy investors do not understand the conditions of each note.
Lipner: The biggest seller of PPNs was Lehman. So I don't care what happens to the index, the people who bought these have lost all their money.
Lipner: These are what I've come to see as code words. Notes are always principal protected. That's the whole point! Here's the Lehman notes sold in 2008. If the index goes up, you get the index return. If it goes down, your principal is protected. That was the promise. But you know what they're doing with the money they raise? You know what Lehman was doing with that money? They were funding their operations. They weren't buying securities and protecting it with some kind of hedge. They're borrowing money from their clients. Actually from UBS clients because UBS sold the Lehman notes.
Ervolini: They were just general obligation bonds.
Lipner: General balance sheet debts. Unsecured. But they make it sound like they're buying a basket of stocks, and you'll benefit from the upside, and they'll insure the downside for some modest premium. That's not what was going on. They're funding operations. And on the confirmations [the paperwork clients get to confirm they want the notes], all it says is for risk disclosure see prospectus at sec.gov.