subscribe to our newsletter sign up
Be wary of ‘hard-to-understand’ products

Be wary of ‘hard-to-understand’ products

Shane Oliver, AMP Capital, GFC, Global Financial Crisis, Collateralised Debt Obligations,

Ten years on from the global financial crisis, investors are being warned to be cautious of buying into products which are difficult to make sense of.

Shane Oliver, the leading economist at investment firm AMP Capital has urged investors to be careful when investing in products created through “financial engineering” or which are hard to understand, noting similar products played a key role in the GFC.

“The GFC was the worst global financial crisis since the Great Depression,” he said.

“It saw the freezing up of lending between banks, multiple financial institutions needing to be rescued, 50 per cent plus share market falls and the worst post-war global economic contraction.”

This was spurred on by a “massive easing” of lending standards, allowing people to receive loans they were unable to service and packaging these loans with other loans to create securities to be sold to investors, Mr Oliver explained.

These products were then given good ratings as a low-risk investment “on the basis that while a small proportion of loans may default, the risk will be offset by the broad exposure”, and then sold to willing buyers under “fancy names”.

Not only did these products play a role in bringing about the subsequent crisis (which occurred after the US central bank drastically increased rates, leaving many people unable to pay their mortgages), but investors who held these particular products were also the most badly affected.

“The biggest losses for investors in the GFC were generally in products that relied heavily on financial engineering purporting to turn junk into [well-rated] investments that were impossible to understand,” he said.

Mr Oliver acknowledged that any potential future market crisis is unlikely to take the same shape as the GFC did, but warned there will be similarities.

“Of course there will be another boom and bust… but as Mark Twain is thought to have said ‘history doesn’t repeat, but it rhymes’ so the specifics will be different next time,” he said.

Be wary of ‘hard-to-understand’ products
nestegg logo
Promoted Content
Recommended by Spike Native Network
Skeptic - Even the headline is nonsense - how can migration have any effect on the ageing population - it is not like there is a possibility that we will be.......
Contrarian - w ch, you are far too generous in your opinion of this piece on migration’s effect on an ageing population. It is not just one-sided, in fact it.......
Nice to know nestegg... - Agreed - relying on multiples of long term average immigration 'to keep the average age down' is the definition of myopic. Young couples have new kids.......
w ch - Just another one sided article with no comment from experts opposed to immigration at its current vastly expanded rate. Its not matter what you elites.......