[thingylab]

How exactly is this a scam ?

These are very generic products, and many investment banks issued dollops of them (especially tied to Apple) in the past few years.

Basically, they look like bonds that pay a higher-than-average coupon, the catch being that if the equity the note is tied to declines in value, you lose part of your capital. Company treasurers tend to like those because of the high headline return rate (i.e. assuming the underlying equity doesn't tank).

Now, the banks do not take the reverse position. They hedge it (probably not perfectly, but very closely) using a combination of cash deposits and equity options (which is really what these products are about). There is little to no trading PnL on these things. They make money by selling the note $10 when its intrinsic value is $9.50.