Tan Kin Lian's Blog: Caveat emptor: A licence to cheat

Wednesday, October 15, 2008

Caveat emptor: A licence to cheat

Definition by Tan Kin Lian: Caveat emptor (let the buyer's beware): A licence for the financial expert to cheat the unsavvy consumers.

Comment posted in my blog
Dear all ,

Please read this article ( published in BT dated 15 Oct ) titled 'Times to make sellers beware, not just buyers'.

I quote the followings : " ... Here we have essentially an insurance policy taken out by Lehman Brothers via its own special-purpose vehicle named Minibond to protect its exposure to six prominent banks known as 'reference entities' or REs. The money invested by the Singapore and Hong Kong public formed the insurance payout should any of the six have failed over the period in question, and in return for use of the public's money, Lehman paid the public an attractive annual coupon of 5 per cent which was, in effect, an insurance premium.

It was brilliant in its conception, simplicity and execution: Lehman transferred its risk of loss from any RE failure to the public but structured the deal and its sale documents to give the impression this was a desirable arrangement.

If caveat emptor is to be reasonably used as a defence (or a criticism of the retail investing public for not reading or understanding the offer documents), then the cover of the prospectus should have had a description of the exact nature of the product as an insurance policy, the fact that Minibond was Lehman, the financial standing of Lehman, Lehman's reasons for needing the insurance and that the risk of loss was not limited to one of six banks failing but, in fact, seven.

Since this was not the case, there must surely be grounds for claims that disclosure was poor, possibly even misleading and that a defence of caveat emptor is not good enough. If buyers were to beware, then there should have been full and proper disclosure of all essential elements in the proper fashion....."

10 comments:

Anonymous said...: To prevent banker and RM from mis-selling, I seriously think that revoking their license when found guility is NOT ENOUGH. There should be a HEAVY FINE and possibly a JAIL SENTENCE to make them think twice about selling products DECEITFULLY to us!; October 15, 2008 9:02 AM
Anonymous said...: Dear Mr Tan

I am presently a NTUC income policy holder and I have held policies from income since 2001
I never got to know you cos the closest I ever got to know you was seeing your signature on every NTUC income statements that they send to me year after year

I am indeed very touched by your effort to help these victims of financial structured products that turned into a total if not partial loss

I observed how you gather the people at the speaker's corner
I saw how you calm their fears by offering them practically recourses,
just like a loving father you assured them and gave them some hope

that speaks a lot about your character and more so you are indeed a good model for every financial professionals to emulate

You have my full permission to publish my letter in your blog
because all these words that was written about you is true

God bless you , Kin Lian

Yours sincerely
Francis Lim; October 15, 2008 9:20 AM
Anonymous said...: Hi Mr Tan,

Thanks for all your effort to fight for the retails.

In the right perspective, the strong protest on usage CDS/CDO/Credit Insurance is a bit overdone. Not that I condone such product being sold to the public (I have voiced my concern to MAS guys 6mths ago on this type of event happening and it actually blew up!), but I think we really have to look and bark at the right tree.

CDS are not created for investing publics. It was created for the sole objective of making corporate bonds more liquid for traders/hedgers. Your comments on the insurance of bond using client's money is right, but if you look at the right perspective if a person is to sell a CDS on a Singtel name, he is in effect just purchasing the corporate bond of Singtel. Singtel corp bond has a spread over Libor that is equivalent to the CDS insurance premium collected. If Singtel is to default the bond holder and the CDS seller will economically receive the same thing.

So what is the problem here now. The packaging of 6 names onto one single investment entity. This in essence is like leveraging your capital 6 times and buying 6 corporate bonds. If one of them blew up, you lose your capital in that one. But in return you get the spread return of all 6 bonds over libor.

The whole Lehman program was set up quite liberally. There are certain parts of the program that was extremely unclear. Definition of the 'underlying securities' is vague. Those are the things you might want to question the distributing banks.

A few months back when I was still working in bank and giving investment talks to public, I always raised the point that the Lehman minibond of 6 big names has omitted the one name that's most at risk, i.e. lehman. Attendees of my talks might remember that.

Cheers,
Delvin; October 15, 2008 9:20 AM
Anonymous said...: Many insurance agents use caveat emptor to cover up their incompetence and for product pushing.
Their refrain usually is "my customers want it, waht". or "my customers say they like this plan, waht" or "my customers want to see cash fast, waht" or " my customers say her aunties say it is a good plan, waht"
Caveat Emptor cannot apply to financial products nor medicine. Section 27 of the FAA is clear on what insurance agents and consultants must do and be responsible for what he or she has
done or NOT DONE. CE is no defence for incompetence or to be used as cover up by FIs.; October 15, 2008 10:03 AM
Anonymous said...: Someone posted this link on the onlinecitizen.com. I thought I it is a very relevant article titled "Caveat Venditor" or "Let the Sellers also beware". You should just read the first 2 paragraphs.
http://www.time.com/time/magazine/article/0,9171,929518,00.html\; October 15, 2008 10:38 AM
zhummmeng said...: Yes, product selling or pushing is caveat emptor. it does not take the needs of the buyers into consideration.
MAS must ban product selling and remove this option, product advice, from the KYC.
MAS should know by now what damages product selling has caused. And before more damages are being done by the unethical and incompetent insurance agents , consultants and RMs MAS must quickly nip it in the bud and implement and enforce section 27 of the FAA. Don't drag its feet anymore. Malaysia is far ahead of us when it comes to this regulation.
Remember the words of the CEO of HKMA, " the financial markets do not exist to serve the interest of the intermediaries, the FIs or the insurance agents or RMs or to make them rich but the consumers to meet their financial needs and retirement"(not verbatim).
With this mind I hope MAS will do what it is most necessary and make the painful chop even it means sacrificing some heads for the good of the majority.; October 15, 2008 12:25 PM
Anonymous said...: I am a lay person not trained in finance, economics or political science but just use common sense and here are my 2 cents worth of views on the structure products and losses happening to folks here.
Selling structured products make much better profits for the banks than just collecting deposits and providing loans. When banks make better profits, it is good for the gahmen (higher economic growth figure to show gahmen is capable and more taxes can be collected). And also more jobs and fatter paychecks for bank staff. Moreover the issuer of the product and banks are assured of the capital for a long period (3 to 5 or more years) because premature withdrawal will result in a loss for the client. Also because of the perceived better returns and the “low” risks, people invest big amounts in them, even a big minimum amount required in some cases for those of high networth. Things are fine as long as nothing went wrong with such products or their issuers (the foreign investment banks). The investment banks (some more than 100 years history) are also unlikely to fail, or so it was thought. Even GIC invest billions in these investment banks too, with 30 year time horizon if need be.
That’s why MAS allow it. It even allow it to be sold to small investors who has smaller amounts. So to make it big, banks go for volume, ie selling aggressively to as many small investors as possible. That’s where RMs come into the picture, the frontline troops needed to achieve these goals.
But if things go wrong, it can go wrong very badly and widespread as we are witnessing now.
But to the gahmen it is the big picture of balance ie does the pros outweigh the cons and can still move on? If can, then accept the folks’ losses as the price to pay for the big overall picture (economic growth). Just like soldiers’ loss of lives are part of the sacrifice required to win a war.(big picture). The US is willing to pay for the war in Iraq with few thousands of young men and countless more civilian lives lost. So what is a financial loss?; October 15, 2008 2:39 PM
Anonymous said...: Totally agreed with you.
Structured Notes that are credit-linked to Banks are supposed to be very safe products.......until now.
I'm sure most of these investors agree that the Notes are safe in the first place b4 they invest, right?; October 16, 2008 4:53 PM
Anonymous said...: To Anonymous 4:53PM

What nonsense are you talking about ?? Structured Notes are not safe as they were touted to be, in fact they are time-bombs. But the FIs packaged them as safe products so people will buy. Tell me honestly, would you buy if you knew it was a time bomb ???; October 16, 2008 10:44 PM
Anonymous said...: Agreed. it is nonsense. Structured Notes are not safe at all or else the FIs would take them up themeselves. U think FIs don't want to take the public money paying only less than 1% interest rate but using it to get the high return from these so called safe product - CDO. CDO? What is it? Collatorised Debt Obligation? What Obligation? FIs & FIs' rep should make it simple: a 5-yr time bomb may or may not explode in the duration of Notes and see the general investors will try?; October 17, 2008 10:18 AM