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2008 was a very important year for everyone who follows finance globally. The world realized that Milton Friedman’s capitalism model was not possible, that real estate can be devalued over time, that geniuses like Greenspan also make mistakes and above all that some investment instruments of the bank are questionable and even they should be forbidden. By way of analogy, this leads us to comment on one of the bank’s investment and debt issuance instruments: the pledging of liquid assets.

Let’s imagine that John has $ 10,000.00 as savings for emergencies and that he needs $ 8,000.00 to repair his house, then John goes to Pedro who tells him: if you give me your $ 10,000.00 at the end of the year I will return your $ 10,000.00 plus $ 600.00 of interest; On the other hand, in relation to your need for $ 8,000.00 for the repair of your house, I lend you the same $ 10,000.00 pesos that you gave me and I charge you an annual interest of $ 1,280.00. In this scenario, John, who already has the capital for his repair, pays Pedro $ 680.00 of net interest, for lending him 80% of his own money, which Pedro also insured as collateral, in case John can not fulfill his obligation. Does this business make sense to John? What risks is Pedro taking with John’s loan that must charge him $ 680.00 a year? This type of transaction, in banking, is called financial certificate pledge and it is one of the many “services” that are offered to their clients.

Whenever we hear people pledging certificates, we wonder where the banking regulators are. We wonder about the social responsibility of these financial institutions and above all, how much they really care about the economic well-being of their savers.

 Don’t be misunderstood! We understand that financial institutions have an important role in the development of civilizations, we simply point out that although this is valid, they should not be left alone, since they are institutions that are unfailingly profit-driven and are driven by incentives. Profit and incentives without regulation results in financial instruments like the famous CDOs and synthetic CDOs that in 2008 collapsed the world’s economy. Even as Lloyd Blankfein (of Goldman Sachs) tried to convince the world that “they were doing God’s assigned work,” the common public was horrified when he understood the dynamics of these instruments.

In our frank and objective opinion, like the deceptive investment instruments recommended in 2008, today the pledging of financial certificates should be eliminated from the banking services portfolio, as it is an unfair practice, where only one of the parties benefits, without it being truly exposed to a risk that justifies the financial cost of the service.