Downside Protection Products Explained: Counterparty Risk, Structured Notes, Buffered UITs, and CDs
from Leibel on FIRE Hosted by Leibel Sternbach, EA & Freddie Bell
The episode compares downside-protection tools and how much they rely on an institution’s solvency. It explains that flex options cleared by the Options Clearing Corporation reduce counterparty risk, market-linked CDs provide FDIC-insured principal protection up to $250,000, and buffered unit investment trusts (UITs) hold assets in a legally separate trust, limiting issuer solvency concerns even though principal isn’t guaranteed. Structured notes are described as loans to an issuing bank with significant risk: in bankruptcy, holders may be treated as common stockholders, as highlighted by Lehman Brothers in 2008, making “protection” fail when most needed. The discussion stresses diversifying across issuers and time, limiting exposure, and asking advisors why the product is being bought, the worst-case scenario, and what trade-offs exist, including annuity features like bonuses and guaranteed returns that may require long lockups and lifetime income elections.
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