Tan Kin Lian's Blog: Credit linked securities were highly risky, even in good times

Monday, October 13, 2008

Credit linked securities were highly risky, even in good times

Mr. Tan,
Many of the investors here bought the the Mini Bonds before the sub-prime crisis surfaced in the 2H of 2007. At that time, the bonds didn't look high risk, did it?

Given its rating at that time, people knew there was a small chance the issuer would default. Even banks and other companies could fail at any time--there is a small chance. But in good times, people were willing to take the risk.

There are many banks and insurance companies currently having the same rating as Lehman had before it failed. Would you call them "high risk" too?

REPLY
You appear to be speaking for the financial institution that sold the products.

The credit linked securities are high risk. It is not just the risk of Lehman Brothers. The risk is muliplied at least 10 times due to the way that the product is structured. Even in good times, this product should never be approved and should never be sold.

Read this explanation:
http://tankinlian.blogspot.com/2008/10/possibel-wrong-doings-in-structured.html

I have written about it more one year ago, when times are good, to ask investors to avoid this type of product. (At that time, I was not aware about the extent of the risk - due to its complicated structure and lack of tranparency. I am now horrified to learn about the extent of the risk.

26 comments:

Anonymous said...: Hi,frinnds
How about those minibond series7,8,9,10,they are launched at begining or mid of 2008.They are all after the sub-prime crisis surfaced in 2H of 2007.All FIs are
big cheater,is it?; October 13, 2008 9:20 AM
Anonymous said...: If Mr. Tan would call for a talk on the danger of minibonds at the speaker corner before the lekman brother collapse, do you think so many inventors will turn up like now? I say less than 30 turn up. Why- who care about it unless after you got burn.; October 13, 2008 9:49 AM
Anonymous said...: I have been reading your blog since the beginning. You have also pointed us to AskDrMoney's explanation.

As a result I took your advice to avoid structured products. Thank you and also thanks for helping investors to file an appeal to GOS to look into the issue. Really appreciate your coming forward to help us.; October 13, 2008 11:45 AM
Anonymous said...: I agreed with Mr Tan KL. It is not the risk of the banks in the reference entity. It's is the way the product is structured. How can one gets back ZERO if one of the 6 banks failed? Simple mathematics tell you that you should not lose more than 20% at most! And the worst thing was the money was channeled to back those subprime mortgage loan, again structured in a way that was opaque to the investors. So search your consciencious before you make those comments on Mr Tan. If your mother was affected, what do you think now? Be fair to those who were "cheated" !; October 13, 2008 12:46 PM
Anonymous said...: When you go to the bank and buy Minibond, Pinnacle notes, XXX notes, etc the banks act only as an agent or distributor. The value and safety of your investment now is between you and the issuer (Lehman, Merrill , etc) of the notes, nothing to do with the bank, unlike savings or FD account.
If people realise this, then they would have realised the danger. After all, how many ordinary folks are comfortable with Lehman, Merrill, Goldman, Minibond Ltd, etc. as compared to DBS, UOB and OCBC? Many thought they are still dealing with and backed by the local banks, whom they trust and of course they are also misled by the bank RMs.; October 13, 2008 2:08 PM
Anonymous said...: Interesting how you put "cheated" within quotes. This isn't a clear cut case of cheating. I'd think it's better to call it a deficiency in transparency and investor education.

In my view, this problem been going on for years. It first happened with structured deposits in the early 2000s. After about a year of big outcry in the papers here, things quietened down and then people gradually forgot about the lessons learnt by some people.

No doubt, this was a complicated product. Heck, if I didn't bother to read the whole prospectus, I am sure I'll be burnt by the experience too. We can ask the authorities again to "police" the financial products but do you think they will?; October 13, 2008 2:17 PM
Anonymous said...: Yes I think this chap is working for the FI or is one of the RM. It is not the individual FI risk which we are facing. It is the tricky structure of the notes that could wipe up the entire investment that is really risky. Buying the notes is not like buy a bond. Our risk is not covered or spread by the many parties in the notes. On the contrary, we take more risk than buying a single bond. Because for the notes, one default out of 100 name may just be enough to wipe out all your capital. This chap is obviously arguing without his conscience.; October 13, 2008 2:21 PM
Anonymous said...: I feel so sorry for not knowing your blog earlier.
Ya, I agree that structured investment products are high risk items & should not be exposed to elderly / ordinary people who does not understand its fundamentals, let alone slandered by promoters who oblitered these ultimatums. Such products should be classified or banned from our market.; October 13, 2008 3:01 PM
Anonymous said...: I think the person who wrote to Mr Tan does not seem to be familiar with the contention that most (if not all) of us are making here i.e. that the FIs sold us something quite different from what they told us.

Of course, we realise there is a risk (there's a risk in everything), but it depends what you are told about the level of risk. I think you need to find out more about the whole issue before you offer your comments/views.; October 13, 2008 3:28 PM
Anonymous said...: Hi All,

As someone who almost invested in the Minibond Series, I'm really amazed that investors of these Structured Notes are now blaming their bankers for mis-leading and mis-selling them these "toxic products"! Investors have conveniently forgotten that for the past 2,3 years, they have been enjoying the quarterly interest of about 6% p.a. from their respective banks. When things turn sour, these same investors start pointing fingers at others--- bankers, MAS, government,brokers etc---- except themselves. Let's look at things in perspective :

THE MAIN REASON WHY INVESTORS ARE WILLING TO PUT THIER HARD-EARNED MONIES INTO THESE STRUCTURED NOTES IS BECAUSE THESE NOTES ARE PAYING MUCH HIGHER INTEREST RATES THAN WHAT OUR LOCAL BANKS ARE PAYING FOR FIXED DEPOSITS eg. 6% vs 2%.
PLUS THE FACT THAT THE ENTITIES THAT THESE NOTES ARE LINKED TO ARE BIG WELL-KNOWN BANKS LIKE LEHMAN BROS, MERILL LYNCH, GOLDMAN SACHS, CITIBANK, AND EVEN UOB AND DBS. THESE BANKS HAVE CREDIT RATINGS OF AA & ABOVE. WHAT ARE THE CHANCES THEY HAVE FAILED?? THE ONLY PROBLEM I HAVE WITH SUCH NOTES IS THE LONG LOCK-IN PERIOD OF 5 YRS OR MORE. THAT'S WHY i DIDN'T SIGN UP.
REMEMBER, CAVEAT EMPTOR??

We must learn to be responsibile for our own choices. By the way,should I blame my remisier for my stock market losses now??; October 13, 2008 3:47 PM
Anonymous said...: Anonymous 3:47PM, do you think the
person whose comment you quoted fully understood the risks of the structured product?

abosolutely not, because he did not realized that the risks is 100% loss of the principal. He did not know it isinvested in CDOs. He was thinking of it as a fixed deposit with 6% interest at banks like Lehman brothers, UOBs.

another point is that the risks of stock market is well-known to most of the people, however, vry few people understand what's CDO, let alone the investors were not informed of the product invested.; October 13, 2008 4:24 PM
Anonymous said...: Its not blaming the RM. Its the way these Notes are marketed as "safe/low risk" products. If it is marketed as high risk products with high returns then it is up to the investor to decide whether to invest. But it is positioned as a relatively safe product, means the RM does not understand the product well enough, which means that it IS a Misrepresentation!; October 13, 2008 4:33 PM
Anonymous said...: In my opinion, it IS supposed to be a low-risk product (that's why interest rates promised by such Notes are about 6% and NOT 15~20%)..... until the shocking events of the past few weeks occurred. Who would imagine that AIG, Lehman Bros, Merill Lynch, Bear Stearns can get into BIG trouble????; October 13, 2008 4:50 PM
ym said...: Anon3.47pm,
of course you cant blame the broker for your stock losses, becoz YOU CALLED HIM to buy this and that stock..

while an aunty/uncle goes to the bank and ask for a safe FD, but their money got diverted to a high-risk derivative product that insures bonds (they simply do not have the capacity do underwrite such risks no matter how unlikely)..

your reasoning is very poor...; October 13, 2008 5:44 PM
Anonymous said...: Anonymous 3.47pm

When I buy stocks, I know what the risks are. When I put money into FD, I am aware of the risks and returns. When I put money into foreign currency FD, I know about currency exchange risks.

The point is when the banks sold these products they misrepresented the risks and the structure of the products. Really, you need to find out more before commenting.; October 13, 2008 6:12 PM
ym said...: Anon4.50
it is also very very unlikely that your neighbour dies in the next year... its probably abt 1/1000..

so why not insure that risk?.. you get paid a small premium say 1,000SGD and when he does die, you lose 1,000,000

yet another example of very poor reasoning... the simple fact of insuring unlikely big risks means the product is risky!.. and unsuitable for retail uncles/aunties..; October 13, 2008 7:58 PM
ym said...: another point is that RMs, having passed the "esteemed" CMFAS exams, should jolly well know that the way to measure risk is NOT using low likelihood,..

risk is traditionally measured using standard deviation.. and infact the smaller the likelihood of an event, the bigger the stdev...

RMs need to own up and admit that they cocked-up the retirees savings and stop finding excuses to cover their A$$es!; October 13, 2008 8:11 PM
Anonymous said...: All I said was people never learn from the mistakes of others, and that this hardsell by bank staff, people listening only to the rosy features, and poor investor education has been going on for years. You all think Oh, this fella must be working for the bank. If you jump to conclusions like that, it is no wonder that you fall for hard sell techniques.

Wise up folks--and tell your parents and grandparents too. The PM and MAS has been saying Buyer beware for years. They can only do so much. Gov meddle and regulate too much--you all complain. Things go wrong--you all complain gov never regulate and protect you.

For all those who accuse the banks of misleading, please show us a copy of the prospectus. Upload a copy of the PDF. I cannot find one copy on the web. I'm interested to see if it does state one default of the eight will mean total loss of capital or did it leave that fact out completely. If you don't have it, then you are in about as good a position as I am to say anything here or anywhere else.

Mr. Tan KL, do you have a softcopy of the prospectus? Upload for all to see. Let us dissect it.; October 13, 2008 10:09 PM
zhummmeng said...: observer,
you are not observing but peeking through a a.. hole. No wonder you have an illusionary view of things. First, waht regulation by MAS ? You call supervising regulating?.
What buyer beware? you mean the RMs warned ah pek and ah soh of the risk? They bought despite knowing the risk? If they were told like this they would not have bought.
Instead they were told they could earn higher return without risk.If the ah peks and ah soh sat for the same exam like the RMs, CMFAS 8 to understand capM they would understand the risk reward relationship
Let me ask you, Obsverver, how much do you know how these CDOs, CDOs squared, CDOs cubed etc etc were packaged and how they were insured and who unwittingly became the insurers?.
Yes the RMs misled the investors into believing that the investment products were riskfree. If the RMs had looked, no need to observe, at ah peks and ah sohs physical appearance and their antics they would have concluded they were risk averse and kiasu and kiasi tolerance. No need to go further. The problem was the RMs saw sales and commission and not the ah peks and ah sohs .
The CEO of HKMA said that the market exists not to serve the interest of RMs and banks to earn high commission or meet high quotas but the ah peks and the ah sohs.
Ah peks and Ah soh reading the prospectus? You must be joking. I let you read for one week I don't think you can understand. Ah peks and ah sohs had only 20-30 minutes to look at the prospectus and to come to a decision.If these products were displayed and sold in the supermarkets the Ah peks and ah sohs probably would not have been miss-sold because it would be buyer beware.They would not have the RMs to lie and mis- represent and to pressure them.
Sue the RMs and the banks under section 27 of the FAA.; October 14, 2008 12:49 AM
Anonymous said...: Hi, for those who wants a softcopy of the minibond prospectus, you can get under this URL link to MAS.

http://masnet.mas.gov.sg/opera/sdrprosp.nsf/4a2a4ce1227ca7cb48256b3d00322b8f/72ffdca666fe65fd48257433002ae847?OpenDocument; October 14, 2008 1:41 AM
Anonymous said...: I agree with Mr Tan that credit-linked securities are not supposed to be sold to retail investors because they are not as informed as institutional investors. I believe MAS should have done more to protect retail investors.

I feel that those securities should not have been called a 'bond'; the name 'Minibond' is already misleading.; October 14, 2008 8:41 AM
WY said...: There are very big differences in:
1. “buying a bond” vs “getting income from providing an “insurance” to the bond through derivatives”

2. “buying multiple bonds” vs getting income providing “1st-to-default insurance” to multiple bonds

3. “knowing the risk and buy” vs “being misrepresented on facts and buy”

Minibond is not a bond.
I really think MAS need to provide “MoneySense” article on Minibond real fast to educate..

To use analogy of stock market and remisier, for e.g:
If you ask your remisier to buy SGX shares, then he asks you to buy SGX warrants as he convinced you that they are the same.
And one day, the warrant expired (or any reason that causes it worthless)..; October 14, 2008 2:05 PM
Anonymous said...: hi All,

if u guys go to OCBC to open a FD account, did the bank officer ever tell you there's a risk.... the risk of OCBC going bankrupt and you not getting a single cent of your principal??? So, should OCBC goes bankrupt before you can collect your FD principal plus interst, do you go around blaming the OCBC banker for NOT highlighting this risk??

You just cannot expect the bank officer to "tell you everything" about the risks of the product being sold to you. Holders of minibonds and other sturctured notes had in the past 2 yrs been enjoying the 6% p.a. quarterly interest without conmplaining until now. CAveat Emptor , please!; October 14, 2008 4:30 PM
Anonymous said...: Actually, the Business Times had a few articles on Minibonds this year and last. Can't remember exactly how comprehensive the articles were in educating the investors, but it did say stick to what you understand. It also highlighted the "first to default" factor, which would cause the product to terminate. That should already tell the investor it sucked. Anytime, the issuer can call the note also--another sucky factor. Of course, the BT readership isn't as wide as some other papers.

Anyway, no one can post a PDF of the actual DBS High Notes 5 document on the web--prospectus etc. Masnet has removed it cos it is more than a year plus now. They only keep the latest within a year or so.; October 14, 2008 10:32 PM
Anonymous said...: To Anonymous 4.30pm :

For FDs, we can get back at least $20,000 from the bank if it goes bankrupt, this is guaranteed. In this case, the bank did not highlight the risk that we may get back nothing if Lehman Brothers goes bankrupt. This is misholding of info and mispresentation.

p/s. May I ask if you are paid to write such negative comments on this blog ? (if answer is no, then go get a life, please !); October 16, 2008 9:45 PM
Anonymous said...: Actually many FD investors thought these credit linked notes 6% per year interest for a locked up period of 3 to 5 years is a good return.

However, they don't realise there are unit trust that earned 6% - 9% a year without any lock up period.

In unit trust the risk is transparent, you know where the money goes, even if there is a loss.

In structured product, the risk is too opaque. You can't see where the money goes and it is hard to monitor.

Hence my own conclusion is these structured products is too risky for such a low return.; October 18, 2008 9:34 PM

Monday, October 13, 2008

Credit linked securities were highly risky, even in good times

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