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Absolutely, and I’d argue that the person pitching it to him didn’t understand it either, especially the risk. There’s no such thing as “risk-free higher returns”.

Of course, part of the blame has to be placed on ratings agencies. Mish has a great series of posts tracking a specific tranch of non-subprime mortgage CDOs of which 92.6% were originally rated AAA. One year later a quarter of them are delinquent or in foreclosure. But that just highlights the need for investors to personally take responsibility for their own money. In this case, the investors didn’t understand what they were buying, but trusted that their advisors did. The advisors didn’t understand either, but they trusted the ratings agencies. The ratings agencies, from what I understand, trusted the people selling the debt, which is a dumb thing to do in my book. But the bottoms line is, no one cares as much about your money as you do.

Due to the credit crunch and now endemic credit risk aversion, it is somewhat concerning that all of these loans in the future will only come from one source. And that one source will only be the chartered banks – then they can turn off the taps and only loan money to people who don’t need it at very high interest rates – just like in the old days…

“I’m just a farmer, I don’t know about big dollars and big stuff,” said Murray Candlish, who along with his wife Cindy owns about $350,000 of ABCP, “our entire life savings.”

He is talking about the restructuring, of course, but I’ll wager that he didn’t understand ABCP when it was pitched to him either.

Whether investing through a broker or on our own much heartache might be avoided by simply passing on any investment we don’t understand.

I think the most important lesson in finance is don’t invest in something you don’t understand. That applies equally to individual investors and fund managers. Warren Buffett has harped on that point in the past, and the current mess illustrates it. If you don’t know why company X or security Y is beating the average, you have no idea about what it will do in the future.

I actually may have come close to getting snagged by this myself. Last year I opened a Credential Direct account specifically to buy short-term bonds as an alternative to a GIC. I was disappointed by the lack of selection and the hassle of having to do the trades over the phone before 11am Pacific, so I put my money in PHN’s bond fund instead. PHN was ahead of the curve making sure they had no ABCP or sub-prime CDOs, whereas I’ve heard about a couple people here on Vancouver Island who invested with Credential Direct and got their money tied up in ABCP.

Thicken: The latest saga does seem to be another instance where the little guy gets screwed. It’s a tough choice: give up the right to sue and get something or risk everything by voting against the deal.

As a pure aside, the reason why financial institutions did this is not necessarily because they sold the product. Financial institutions, depending on the terms of the paper, provide “liquidity support” which means, in plain English, they have to put money into ABCP in certain case (such as cash shortage). I cannot speak for the paper involved here but this is why the financial institutions got freaked out in general globally. Depending on the terms of the agreements, some financial institutions are on the hook to inject cash to keep the paper afloat. They sold bad paper and now they are re-arranging the game to avoid their obligation as both seller and liquidity support (depending on the deal terms).

No one seems to be focusing on this point. The financial institutions NEVER indicated they would put the trusts in receivership when the stand-still agreement was entered into (and the media quietly played along or missed the boat). They painted this all along as trying to put stability into the market and then, once they all agreed to terms in which their cash and legal obligations would be capped or eliminated, then they put the trusts in restructuring and broke the bad news.

What really stinks is if the individual investor votes against the restructuring plan, they probably get cents on the dollar whereas if they vote for it, they get dimes on the dollar.

Perhaps the lesson to be learned is never invest in a structured product, the house is stacked against you.