tailieunhanh - Lecture Financial derivatives - Lecture 6: Equity funding corporation of America

The contents of this chapter include all of the following: The insurance funding program, the first scam, the next scam, the really BIG scam, the final scam, the house of cards collapses, the fallout from equity funding, an analysis of the causes, the lessons learned. | LECTURE 06 Equity Funding Corporation of America The insurance funding program The first scam The next scam The really BIG scam The final scam The house of cards collapses The fallout from Equity Funding An analysis of the causes The Lessons Learned The insurance funding program - 1 Equity Funding Corporation of America was founded in 1960. Its principal line of business was selling "funding programs" that merged life insurance and mutual funds into one financial package for investors. The deal was as follows: first, the customer would invest in a mutual fund; second, the customer would select a life insurance program; third, the customer would borrow against the mutual fund shares to pay each annual insurance premium. Finally, at the end of ten years, the customer would pay the principal and interest on the premium loan with any insurance cash values or by redeeming the appreciated value of the mutual fund shares. Any appreciation of the investment in excess of the amount paid would be the investors profit. The insurance funding program - 2 The company had a huge sales force. The thrust of the salesmans pitch to a customer was that letting the cash value sit in an insurance policy was not smart; in fact, the customer was losing money. The customer was encouraged to let his money work twice by taking part in the above deal. The development of such creative financial investments was a trademark of Equity Funding in the early years of its existence. After going public in 1964, Equity Funding was soon recognized across the country as an innovative company in the ultraconservative life insurance industry. The insurance funding program - 3 This | LECTURE 06 Equity Funding Corporation of America The insurance funding program The first scam The next scam The really BIG scam The final scam The house of cards collapses The fallout from Equity Funding An analysis of the causes The Lessons Learned The insurance funding program - 1 Equity Funding Corporation of America was founded in 1960. Its principal line of business was selling "funding programs" that merged life insurance and mutual funds into one financial package for investors. The deal was as follows: first, the customer would invest in a mutual fund; second, the customer would select a life insurance program; third, the customer would borrow against the