Investors nationwide should be wary of Citigroup principal protected notes due to the financial industry's questionable creditworthiness, regardless of U.S. Treasury support. The same type of structured product recently caused UBS clients to suffer dramatic losses after UBS misrepresented the creditworthiness of principal protected notes, which were back by the now-bankrupt Lehman Brothers. Lehman's bankruptcy left holders of at least $8 billion of its notes waiting in line with other senior unsecured creditors. Investors who suffered losses will be fortunate to collect more than 10 cents per dollar invested in these so-called safe and guaranteed investments.
A Principal protected note is an investment contract with a guaranteed rate of return of at least the amount invested. Traditional fixed-income investments such as CDs and bonds provide investment security and modest returns with little or no risk of capital loss, while stocks have the potential to deliver greater returns, but with much greater risk. In recent years, investors have turned to structured products such as principal protected notes that offer both security and potential growth for their principal. Principal protected notes are linked to a broad range of underlying investments that may include indices, mutual funds, equities, and even alternative offerings such as hedge funds. At the heart of a principal protected note is a guarantee - typically guaranteeing 100% of invested capital, as long as the note is held to maturity. This means that regardless of market conditions, investors receive back all money they invested plus appreciation from the underlying assets, if any.
Since the global financial crisis began, Citigroup has racked up more than $100 billion in credit losses and writedowns and sold businesses and reduced employees to preserve capital. Still, Citigroup managed to sell more than $211 million in principal protected notes in 2009, which were tied to Citigroup's own creditworthiness. This came only one year after the US government had to inject $45 billion to save the ailing bank.
Principal protected notes are subject to the credit risk of the issuer. Consequently, if an issuer is not financially sound, it cannot guarantee 100% redemption of principal at maturity to an investor if the underlying investment deteriorates in value. That is why investors, especially those in retirement, should not be misled by the words "principal protected," no matter how appealing the investment is perceived to be. This also goes for investors interested in principal protected notes sold by banks that expect the Treasury to stand behind them.
Have you suffered a loss in a principal protected note? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at email@example.com for answers to any of your questions about this blog post and/or any related matter.