Within weeks, Goldman Sachs is expected to offer individual investors four-year certificates of deposit with annual yields as high as 24 percent a year. The CDs will be government insured and could offer a guaranteed rate of 0.5 percent a year according to reports form Bloomberg.
Bigger gains come if stocks rise and that’s the hook Goldman is using to get small investors into derivatives.
When stocks go up, the CDs will offer investors a monthly return equivalent to the gains achieved in an index, with a cap of 2 percent. If the index goes up more than 10 percent, as many stock indexes did in October of this year, the investor will only get 2 percent and Goldman will keep the rest of the gains.
Losses are uncapped, and investors would fully participate in declines such as losses of more than 7 percent seen in September. At the end of four years, investors will get at least their original investment back, plus the guaranteed minimum interest.
In effect, these CDs will be derivatives designed for individuals. Capping gains ensures that Goldman has unlimited up side. To ensure they meet the guaranteed payout, they will most likely combine zero coupon bonds with a leveraged stock market investment.
Not content with merely being a Wall Street powerhouse, Goldman is preparing to move onto Main Street. Investors should remember that Goldman managed to win billions from sophisticated hedge funds on derivatives bets in the past.
Given the firm’s track record, it seems unlikely that these will be a good investment for individual investors.
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