"Our Market Linked CDs provide value to our clients and their fees are fully and clearly disclosed," Elise Wilkinson, a spokeswoman for the San Francisco-based bank, said in an e- mailed statement.
Citigroup Inc. offered a 15-year CD last month called the "Libor Inverse Floater Contingent on the S&P 500 Index Market- Linked Certificate of Deposit" that pays an initial 6.5 percent, more than eight times current one-year, fixed-rate deposits, according to a Citigroup term sheet.
After the first year, the rate is based on a formula of 1.1 times the difference between 5 percent and the three-month London interbank offered rate on days when the S&P 500 is equal to or above 75 percent of its starting value. The index closed yesterday at 1,350.50. The New York-based bank has the option to redeem the CD after the first year.
Difficult To Value
"The investment allows clients to take advantage of a view that rates will remain relatively low," Nicholas Parcharidis, managing director and the head of Americas sales for Citi Private Investor Products in New York, said in an e-mailed statement. "It gives them the opportunity to earn 6.5 percent return in year one and to potentially enhance returns above low fixed rates in subsequent years. The risk is the opportunity cost of potentially earning zero interest in subsequent years."
The derivatives and formulas make the investments difficult to value, Auburn's Swidler said.
"It is questionable whether some of these products should be sold to retail investors in the first place," said Moritz Seibert in Westport, Connecticut, the former U.S. head of equity derivatives structuring at the Royal Bank of Scotland Group Plc who's now starting an alternative investment business. "Traders at issuing banks understand the nitty-gritty pricing of those products very well. It seems that professional institutional investors would be a more suitable clientele."