Many investors bought the credit-linked notes without understanding the nature of the risks. When they found out later, and some of the underlying assets had turned bad, they wanted to cash out and take a loss.
The only buyer of the product are the product issuers who quoted a very low price for the product. The investor is not able to assess what is the correct price of the product, as they do not have information about the underlying assets and the extent to which they are likely to default.
The product issuer has the information, but they are acting with a conflict of interest and a monopolistic position. They can quote a price that is much lower than the underlying value and make a big profit.
What can the investor do? It is best to take the risk and ride it out. If the situation become worse, it is bad luck. But, it could turn out to be better. If the investor accept the low price now, it is likely to be much lower than the value of the underlying assets, and the investor is likely to take a much definiate loss now.
Is this fair to the investor, to be placed in a weak position against the financial institution that has the information and is taking advantage of the lack of information and desperation of the investor?
A similar situation applies in the case of the policyholder of a life insurance policy who wish to cash out. The cash value quoted by the insurance company is likely to be much lower than the actual underlying value. This allows the insurance company to make a profit on the terminated policy. The policyholder already suffered the large deductions to pay the commission to the agent, the cost of the life insurance cover and the high expenses. Why should the policyholder have to take another big penalty to give more profit to the insurance company?
The lesson: do not trust any financial institution that creates proprietary products where there is no free market for selling off the product at its fair value. You will be placed under the mercy of the financial institution, which will seek to maximise its profits at your expense.
