Friday, August 23, 2013

Currency Trading: The next scam in the making?

I am seeing of late a lot of material flooding my inbox on Currency Trading. It looks like that is the next thing that the banks are on to, to make suckers out of all of us.

In the old days when things were much better, the banks were quite laid back, and in our economy, almost like a cartel of oligopolists, controlling access to capital, and being controlled by politicians who benevolently distributed largesse from their kitty to expand their constituency. They all got their salaries on time, did  little work and prospered. Opening of branches was controlled (it still is), and there was no competition worth the name. Listed or not, being virtual public sector entities, they had little incentive to push products or over-exert themselves to get business. In a way, this was good for all of us as consumers since we were not pushed to invest our money in all kinds of unsuitable schemes and products.

Then many private banks entered the scene. The banks started recruiting aggressive young MBA's, and a 'meritocracy' culture took root. They all had to show advancing profits in the interests of advancing their careers. The banks even had their shareholders to answer to, and show increasing profits of course - what else does the shareholder care about? Who does one make the profits from? The customer of course. All in the interests of serving him better.  But then banking is almost a commodity business, and there is very little differentiation when it comes to the non-fee based routine 'collect liabilities create assets' kind of banking. So what do you do?

You of course look around for allies who can help you make money. And the best allies are of course the insurance industry and the mutual funds. The banks became agents for insurance companies and mutual funds, in several cases, companies that were allied to their parent and started peddling their products. All bank managers were expected to 'leverage' their closeness to their customers and 'educate' them about the greatness of these financial products. There were of course targets - remember, we are a meritocracy - and the targets were in terms of sales, skewed towards sales of ULIP's and New Funds. ULIPs were the longest running scams of the insurance industry for a long time, and the maximum commissions were offered for New Funds. Lots of investments were being channelled into ULIP's and lots of customers were constantly exhorted by their trusted bankers to churn their funds, all in the interests of 'financial security' of course. We know what happened to that. IRDA cracked down on ULIPs and SEBI on New Fund commissions. 

So the dalals (oops, I mean bank executives) changed their strategy. Suddenly, it was good for the customers to go in for traditional insurance products. Good for their health, good for their well-being and good for their spiritual upliftment. They of course trust their bankers and start shifting towards these products, which have a long history of not giving their customers more then 5 to 6 percent return, when inflation in the economy has been far above that. 

In the meanwhile, the 'products' departments of the banks were busy 'structuring' new products, all a mix of insurance, mutual funds, risk protection, investments, returns, guaranteed bonds, risky equities, all kinds of kinks, heavy surrender clauses, lots of small print which was never obvious, and glitzy marketing strategies. The commissions to the banks were huge but hidden, and once the customers were hooked, they had to continue to pour good money after bad to ensure a decent exit, since the pre-term surrender clauses were very adverse. It was easy to sell them of course - there were careers waiting to be advanced in the banks - all those MBA's they recruited are of course ambitious young kids and you need to give them opportunities for advancement. So their targets of course included selling these structured products.

When my mother-in-law had just retired and wanted to invest her PF and other proceeds, three executives from this leading private bank landed in my house and started selling her a pension plan! I, being her financial advisor, was with her and almost came under their hypnotic spell myself. My mom-in-law of course had left it all to me, but I could well imagine others in her place listening to those bankers, and coming under their spell; just like they come under the spell of priests and astrologers. The trick, I realised, is to start off with a lot of mumbo jumbo laced with jargon (bhagwan, dosham, rahu, ketu, pariharam in one case - and pension, guaranteed, safety, high return, security, etc. in the other) which brings the victim to a trance-like state, induce a state of panic (you have 'seven year sani' since Saturn is eating into Mars / imagine your old age without pension and no other means of support), meet all queries with arcane jargon (Guru in the eighth house increases risk of death in the family / guaranteed capital protection means with triple cover), and then suggest the way out of all troubles (if you do this pariharam at Rameshwaram you will be ok / if you buy this ULIP/ endowment / pension plan you will ensure a good retirement) - usually, when the victim signs on the dotted line handing over her money to you, she actually feels indebted to you! And what you have sold her is a pension plan (post retirement!) or a 'structured product'!

The same thing happened recently with my mother - when all she wanted to open was an FD for a couple of lakhs, was the time when the 'trusted banker' cornered her and started pushing some structured product which would have given her at best a return of 7 percent (if she kept contributing for the full term, 15 years), or less (if she 'surrendered' any time in between). And this recommendation of a 15-year product, to a seventy-year old!  It of course had a heavy insurance component - it is usually lost on these bankers if you tell them that a seventy-year old with no dependents does not need any life insurance.

In the meanwhile, commodity markets took off in India. MCX, NCX, and all kinds of X were set up to facilitate 'trade' in commodities. They appointed brokers, who of course started to induce common folks (people like and you and me that is) to 'invest' in commodities with a 'sure' return of 12-13%, 'risk free' and 'guaranteed' by the exchange. All kinds of marketing gimmicks were of course used to induce people to undertake margin trading in commodities, a very risky game even if undertaken by those in the know. And what did these people understand about sugar, guar gum, cotton, castorseeds? They were told that it was enough to have some basic knowledge, which could of course be given to them in a crash course in the brokers' offices. And there were various software products which would teach them about commodities. And research reports sent by the brokerages themselves!! And the 'common public' piled on into commodity speculation. And then NSEL collapsed. It is almost certain now that there is fraud involved, and many 'investors (suckers?)' will stand to lose their money. The brokers of course are washing their hands off the matter - according to them, they acted in "good faith"!

I don't know why bankers were not peddling commodities - must have been some regulatory issue that came in the way. But how can bankers be far behind? They were looking for the next big thing to peddle, one that will bring in guaranteed commissions and trading fees for them, while the customers would bear all the risk. So I guess they hit upon currency trading! 

There is a spate of such ads (as the one below) from various banks that I receive nowadays, all exhorting me to trade in currencies. The dollar-rupee exchange rate. Even the yen-dollar rate, or the pound or euro. Whatever. So long as I trade in something. And they are offering to 'train' me for free, so that I then get a 'free' online software and indulge in currency trading which will surely make me a fortune! Currency movements are something that involves very big players including central banks and institutions like Goldman Sachs and JP Morgan. It is a sea in which only sharks swim. And they are inviting me, a minnow, to swim along with the sharks. I will of course be trained, and I am sure, helped by 'research reports' that the banks will make me privy to.  How exciting!

That is what the poor fish thought before he swallowed the bait at the end of the fishing line. How exciting!

Attached below is the mail from ICICI Bank (not the only one sending such mails) exhorting me get into currency trading.

---------- Forwarded message ----------
From: <>
Date: Thu, Aug 22, 2013 at 2:25 PM
Subject: Investor education session on Currency Futures by

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Greeting from
We are pleased to inform you that has organized investor seminar on Currency Markets for you in your own city.
This training will be on Introduction of Currency Derivatives, through which you can trade in dollar, euro, pound and yen against Indian rupee.
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Introduction to Forex Market
Introduction to Currency Futures in India
How to start trading in currency
Currency a hedging tool
Currency - An asset class product to diversify portfolio
Factors influencing currency exchange rate
Product specification
Forwards v/s Futures market comparison
Trading in currency with
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