Reverse convertibles

June 17, 2009 in Finance

Ever since the WSJ published this article on the front page of section C, a lot of people are talking about "reverse convertible notes."

James Kwak and Felix Salmon led a charge to ban the instruments but Felix, at least, seems to have backed off a little bit after these responses.

I've seen many varieties of these notes in the past, and while I would never purchase one myself (I don't have any interest in ever shorting puts), I know there are many people out there who would - namely, the same people who sell options anyway. Happily, the best analysis I've seen is a response to Kwak by Daniel Indiviglio in The Atlantic. To skip the suspense and jump to his close:

It seems to me that truly useless financial innovation will be eliminated by the market already: if it's not useful, no one will buy it. If you want to regulate to make sure that investors are savvy enough to know what they're buying, that's fine. But to eliminate financial products just because bureaucrats don't understand their purpose seems like a bad idea to me.

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