When the product is designed for you to lose

Graduate · enrolled learners

This lesson opens with Woodbridge Group and Robert Shapiro, 2017.

What happened

Robert Shapiro ran the Woodbridge Group, which sold about 1.2 billion dollars of investments to retail investors, many of them older people seeking safe income, marketing them as secure, high-yield notes backed by a real-estate lending business making loans to third-party property owners. In fact the loans were largely to entities Shapiro himself controlled, little real income was generated, and the returns paid to earlier investors came from the money of later ones: it was a Ponzi. The SEC charged the operation, and Shapiro was convicted and imprisoned, with investors losing a large part of their money. The product was sold in the language of safety and conservative income, exactly the language most likely to reassure the retirees it targeted, while its structure guaranteed that most of them would lose, because there was no real business behind the yield. The marketing described what the investors hoped for, a safe stream of income, and the structure described what they would actually get, their principal used to pay other people until the scheme ran out.

The decision point

Some products are built so that the customer loses on average as a matter of structure, not accident, and they are very often dressed in the language of safety and opportunity precisely because that language disarms the caution the structure should provoke, so a product must be judged by how it is built and who it pays, not by how it is described. Woodbridge is the case: about 1.2 billion dollars of notes sold as safe, high-yield, real-estate-backed income were in fact a Ponzi with no real business behind the yield, marketed in exactly the reassuring terms most likely to attract the retirees who lost. This closes the course's argument: the marketing of a trading or investment product describes the customer's hope, safety, income, opportunity, easy profit, while the structure describes the customer's outcome, and the two can point in opposite directions, with the soothing words doing the work of keeping the customer from examining the structure that dooms them. A product whose returns cannot come from a real, identifiable source, whose safety is asserted rather than demonstrated, and whose yield is high precisely where safety is claimed, is a product whose structure may be designed against the customer regardless of how it is sold. So the discipline that ties the course together is to judge every such product by its structure and its incentives, where do the returns actually come from, who profits and from what, does the safety survive examination, and to treat the language of safety and opportunity not as reassurance but as a prompt to look harder, because Woodbridge shows that the more soothing the words around a yield that has no real source, the more they are there to stop you seeing that the product is built for you to lose.

Recorded loss

$1,200,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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