) earned a terrible reputation during the financial crisis. It
paying $550 million to the SEC
to settle charges, admitting that it offered complex investments
involving subprime mortgage-backed securities to investors --
without bothering to tell them that the hedge fund that helped
choose those securities also had a short position against the
You'd think that having paid such a high penalty for its
misdeeds, Goldman might have learned its lesson. But late last
week, reports surfaced that Goldman is planning to offer a new
investment that unsophisticated investors may find just as
misleading -- and which may disappoint them nearly as much.
The best of both worlds?
According to reports, Goldman plans to offer
equity-linked certificates of deposit
. In contrast to regular CDs, with which you can predict with
absolute certainty exactly how much interest you'll receive
throughout the length of their term, equity-linked CDs typically
use well-known stock indexes like the
Dow Jones Industrial
to help determine their total return. And as their name suggests,
the idea is that if the stock market does well, then your CD's
return will be better.
The key incentive for most investors, though, is the
that equity-linked CDs provide. Obviously, investing in a stock
index fund exposes you to the full extent of any losses for the
market. By contrast, equity-linked CDs usually guarantee that
you'll at least get your full principal back, no matter how badly
the market does. Reports suggest that Goldman's four-year CD will
give a minimum annual return of about 0.5%, while potentially
maxing out at 24%.
To be clear, Goldman isn't the only bank that offers
) sold the first such market-linked product back in 1987. Today,
you can find such CDs at banks including
) . Each bank has a slightly different angle on how it ties
returns on its CDs to the stock market, but they all share the
same general idea: Limit your downside while potentially boosting
Why these CDs aren't worth your time
The problem, though, is that "equity-linked" doesn't mean that
you'll get the exact return of the index the CD tracks. According
to Bloomberg, the Goldman CDs will look at the Dow's returns
every month. If the Dow rises, then the gains are capped at 1.5%
to 2% for purposes of calculating the CD's total gain. If the Dow
drops, however, then the losses are fully incorporated into the
tracking value for the CD.
Obviously, that puts a downward bias on the CD's total return.
And again, while investors may have guaranteed return of
principal -- a guarantee that the FDIC backs -- the chances of
them earning exactly no interest whatsoever are a lot greater
with such artificial calculations underlying the deposit.
In fact, last month's issue of
Rule Your Retirement
included some information on this exact subject. With insurance
) offering similarly structured equity-linked annuities, Foolish
retirement expert Robert Brokamp talked with special guest Allan
cheaper alternatives to get the protection you
. The problem, in Roth's eyes, comes from two places: complicated
prospectus materials that obscure the actual calculations
involved, and huge fees that make these CDs losing propositions.
The Bloomberg article cited one structured CD expert who says
that fees on a five-year deposit can be around 3%.
With banks like Goldman,
(C) , and
Bank of America
(BAC) having taken so much taxpayer money in bailouts, the
American public is outraged at practices that try to trick
customers into thinking they'll get better returns than they
actually will. Equity-linked CDs are exactly the type of
innovation that you
need to get richer for your retirement.
There's another product that banks offer that you may not
need, at least in the near future. You can find out all about why
credit cards are destined to be a thing of the past right here.
Banks may not like it, but you can find the companies that will
profit from what replaces them. Click here and learn more.
Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance. You can follow him
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a