1. Introduction
Many people invested a large sum of money, or their life savings, in the credit linked securities, in the mistaken belief that these securities have low risk and are safe. These securities include the Lehman Minibonds, DBS High Notes, Morgan Stanley Pinnacle Notes and Merill Lynch Jubilee Notes.
These investors lost a large part or all of their investments due to the financial crisis. They were shocked that these structured products had high risk, which they were not properly informed.
The Petition to the Singapore Government ask the Government to see if there were any wrong-doing on the part of the financial institutions that created or marketed these structured products.
These wrong doings could be in the form of negligence, dishonesty or fraud.
2. Wrong-doings
I suggest that the Government should appoint competent people to look into the following areas:
2.1 Was there any fraudulent intent in the creation of these products? Were the products created with the aim of defrauding the investing public? Were the drafting of the prospectus, advertisements and other documents carried out with the intent of hiding the true facts from the investing public? Were the lawyers and other professionals involved in this activity?
2.2 Were the financial institutions that marketed the product aware about the real risks of the products? Did they train their front line advisers to hide the true facts? Were they negligent in not understanding the true risk? Did they monitor the conduct of their front line advisers to ensure that the products are sold to the right people, based on their risk profile and preference?
2.3 What were the actual charges taken out of the structured products to pay the distributor and the product creator? Were these charges disclosed in the prospectus? Were the charges at a reasonable level, in comparison with the work that has to be done and the risk taken by the parties?
2.4 Were there conflicts of interest involved in the transactions between the various parties? Were the conflicts of interest adequately disclosed? Were the decisions on the pricing of the products made fairly in the interest of the investors? Was there any arrangement to ensure that the pricing is made based on fair market values?
2.5 Does this arrangement fall under certain laws, such as the Trust Act or more specific laws? Were there any breach of any of the provisions of these laws?
2.6 Does the fund manager break any law, if it takes out money from the fund that are not authorised by the trust deed?
3. Call for actionI hope that the Government look into these areas, to see if there were any wrong doing that led to such large losses among the investing public.
If there were wrong doing, the Government can take the appropriate action to bring the offenders to Court and to seek suitable compensation for the losses suffered by the investors.
Tan Kin Lian
In the same petition, can we ask the govt to play an active role in damage control, i.e. to ensure that the underlying securities are not un-wound at fire-sales price?
ReplyDeleteWhy FIs continued to distribute Minibond Series 7 & 8 in Nov-Dec '07 even after the mortgage market crisis unfolded in the summer of 2007? According to New York Times (search for Lehman Brothers in www.nytimes.com), Lehman's slow collapse began in the summer of 2007, when its stock began a steady fall from a peak of $82 a share. The fears were based on the fact that the firm was a major player in the market for subprime and prime mortgages, and that as the smallest of the major Wall Street firms, it faced a larger risk that large losses could be fatal.
ReplyDeleteAny negeligence by the FIs and MAS since they should have employed many Fiancial Specialists to go through the prospectus and should have highlighted that Minibond is dangerous since Lehman is the issuer.
From: A buyer of Minibond Series 7 from HLF
IS THERE A CASE FOR "MISREPRESENTATION" AS BANKS WERE TOUTING THESE PAKAGES AS "CAPITAL PROTECTED"..OR CAPITAL GUARANTEED...AND IN THE CASE..."AS MINIBONDS" WHEN IT WAS NOT REALLY BONDS..EITHER MINI OR NOT.
ReplyDeleteDear Mr Tan
ReplyDeleteI think one of the key contentious point in this whole saga is that we should have read the prospectus for the issue ourselves to assess whether the product is suitable for us or not.
But the problem is the way the prospectus had been written. There's simply too much technical jargon for us to understand all the contents written in it. Although we have a responsibility to read it, is it actually reasonable for laymen like us to understand it? Because of this complexity, we have to depend on the integrity and expertise of the RMs or the bank officers selling the product to advise us properly on the risks. There must be a fundamental change in the way these prospectus are written so that the general public can understand them. I believe the MAS has a duty to oversee this especially if the issue is to be offered to the general public for subscription. I am not an expert on how this can be done but surely they can tell if a prospectus has been written for a targeted audience or general public? If former, then the issue should not be allowed to be sold to the general public. If latter, then the prospectus must be written in a way that the general public can understand it. After all, the general public are not financial gurus.
I think the MAS has the duty to prevent such products from flooding the retail market by "testing" the suitability of the prospectus for digestion by the general public.
Thanks, KK
The Minibond prospectus may be difficult to understand, but the section on risk was quite straightforward.
ReplyDeleteThe brochure had a fineprint that said that the product was capital protected unless a credit event happened, with details in the prospectus.
nyyone,
ReplyDeleteyou must be an expert in this sort of thing as several graduates including me thought that minibond is bond based products and that it can only get hit if the referenced entities failed even after we have read the prospectus. For minibond 5, referenced entities did not fail but we still get wipe off.
I suggest that we investors better appoint you to be our RM.
the minibond series 2 is SRS eligible - how could a high risk investment be allowed for SRS?
ReplyDelete8:21pm, thanks for your "compliment". Everyone of us has different risk threshold. Even though I may not understand everything in the prospectus, I decided it was too risky for me.
ReplyDeleteAnyway, I also didn't realize the Issuer, Swap Counterparty and Swap Guarantor would be Lehman Brothers. That threw a big chunk of the safety net away.
Mr Tan,
ReplyDeleteIn the case of one distributor (securities firm), the representative who is a dealer in the firm merely invited potential investors to attend a briefing by Lehman Brothers. The briefing focused on how safe the Referenced Entities are, how safe (what kind of ratings etc) the underlying securities are and how well the products were selling in HK and the fact that there had never been any default in HK. We were also told that we would not be provided the list of what these underlying securities were. However, they were of a certain rating, and we did not even have to know what they were as the risk of any one of them going bad is so minimal. In fact, investors there got back 97% of their principal for the odd case that did not carry on till maturity. Thus all of us were convinced that it was a low risk product, like a bond and as soon as the price starts going down, we could choose to liquidate.
No financial needs analysis was carried out by the dealer and I did not sign any form other than the application form for the bonds.
Recently when I made enquiries at the firm, I was told that the dealer is merely an "order-taker". I guess that they may use this as their defence.
I introduced two relatives (young couple who are not sophisticated enough to understand the prospectus) to the dealer. They also bought the products although they did not attend the briefing. The dealer again did not highlight the risks of the products to them. There was no attempt to do a needs analysis; neither did she find out the risk tolerance of the investors.
I would like to know:
Can the distributor distribute such products in this way and escape liability by saying that there was no misrepresentation on their part since they did not actively recommend the product? The inducement came from a third party.
Please do not publish this comment as I feel that the banks etc are making use of any information given by us to bolster their defence.
Thank you for the support that you are giving to us. Without your blog, many of us would feel very lost.
Tiang
Here is a tutorial on a typical Credit Linked Note:
ReplyDeletehttp://www.youtube.com/watch?v=mxNMEtchKd8
My understanding is that
- DBS High Notes is a type of Credit Linked Note. Investors act as credit insurance provider.
- Minibond is structured notes, investing in another portfolio of notes, which are likely to be of low credit rating or even non investment grade (else they do not need insurance). Lehman Brother acts as credit insurance provider for some of the notes through credit default swaps. Lehman brothers is also counterparty to the currency swap, likely a protection against depreciation of USD.
Both are poorly designed products for retail investors. Retail investors should be advised to invest only a tiny portion of their net worth to each of these products because the high concentration of risk. Such product should be limited to high net worth individual.
These products are flawed.
- DBS High Note
First-to-default basis increases the probability of “default”. This is not in-line with the general risk aversion behaviour of investor. Maximum loss should be limited to the exposure to that particular issue. For example, if the note is invested evenly to 5 reference entities, the maximum loss should not exceed 1/5 of the invested amount plus marked to market losses of other 4 issues. But from investors’ remarks on the web, this is not the case. I do not know the formula at work. But combining this with the first-to-default basis, the inclusion of small number of reference entities provide little diversification. Hedge funds (major players on providing credit issurance) diversify their portfolio to several times more reference entities.
- Minibond
Although credit protection and currency swap provided by Lehman Brothers offsets the losses from the underlying assets, there is high correlation between Lehman Brothers and the underlying assets, which are mainly CDOs and other type of ABS. Lehman Brothers is a major LONG player in the same asset class. With the bankruptcy of Lehman Brothers, Investors lose the insurance protection when they need it most. You can see how highly concentrated the risk to the ABS sector. The counterparty risk grew with the increase of losses from the underlying investments (The value of swaps became a larger proportion of the portfolio). Why limits the counterparty of the swaps to one firm? (Eventually it does not matter if US financial sector continues to implode.) A frequent settlement similar to the futures market or some form of funding requirement imposed to Lehman Brothers by the trustee would have limited the losses.
WATCH OUT FOR OTHER FINANCIAL PRODUCTS THAT INCLUDE OVER-THE-COUNTER DERIVATIES CONTRACT (EMBEDDED COUNTERPARTY RISK)
(no matter it is ETF, ETN, mutual funds, hedge funds, or even commodities related and insurance products, as long as its underlying assets involve OTC derivatives, sometimes through several layers)
DO YOUR OWN DUE DILIGENCE BEFORE PUTTING YOUR MONEY INTO ANY INVESTMENT.