Tan Kin Lian's Blog: High Notes 2

Wednesday, October 01, 2008

High Notes 2

Hi Mr. Tan,

DBS has just sent to HN2 investors a list of names under the so called AA-rated basket of securities held by Constellation, the company owned by DBS and is the counter-party with DBS for various swap contracts.

There are 100 names in the list and I am very surprised that only 25 names are rated AA or better. There are 22 rated BBB+ or below. AA- to A- accounted for the balance 53. How can such a basket of securities rated as AA?

This is akin to call a basket containing a mix of some copper coins, alluminium coins and gold coins a basket of gold cans! This is grossly misleading!

All the while, the bank has been very secretive about this list of names. I think because it does not want to let investors know that the rating of AA for the basket of securities is actually not justifiable. The fact there are some low grade bonds in the basket may cause much discomfort to the investors. The bank as warned that this list is confidential and may not be copied or distributed. What a big secret is it!

The worst thing is after the defaults of 3 names in the basket of securities, the bank informed investors that a further 2 defaults would trigger a credit event. This is very unfair because nowhere in the pricing statement can we find any provision dictating that 5 defaults out of 100 names in the basket will constitute a credit event. The bank has no right to impose such a new default clause now!

On 23.9.08, the basket of securities was re-rated as BBB+. I am not surprised, as it should not have been rated AA in the first place, and the rating agencies have been under a lot of criticism after the subprime problems started because a lot of CDOs in the market were given ridiculously good ratings by such rating agencies.

Mr. Tan, I hope you could post this email in your blog and I would like to call on all interested parties to protest to the bank for being not transparant about the contents in the basket of securities when they launched High Notes 2. We must also object to the bank imposing the new default clause that is not provided for in the pricing statement.

One more thing, the bank proudly stated in the pricing statement that the notes are designed for "defensive investors seeking enhanced yield by providing exposure to a basket of highly rated regional and international banks (the reference banks...." What a misleading statement!

WT

5 comments:

Anonymous said...: Hi Mr Tan

DBS has just sent to HN2 investors a list of names under the so called AA-rated basket of securities held by Constellation, the company owned by DBS and is the counter-party with DBS for various swap contracts.

How is it that DBS did not reveal the list when we bought into the HN2? Though my investment is just $25K, it is nothing compared to those who put in more. Still it is
not so much the value how much we put in, but NOT BEING INFORMED of the list of names under the so called AA-rated basket of securities held by Constellation. If I had knew of this, I wouldn't go into it.

So unethical.

My Relationship Manager told me this is a good investment, as only 8 banks named. And the possibility of any of these 8 banks collapsing is simply zero. Now DBS Bank called me and told me about Lehmann brothers etc. I am truly confused.

HELP.

Ms. Chew K.L.; October 01, 2008 10:58 AM
Anonymous said...: Mrs. Chew KL,
The only way you can help yourself is to sign the petition posted by Mr. Tan KL and also call up the RM or senior officer of DBS to lodge your complaints in writing or email. Or your can ask for a teleconference as the complaints by you thru the teleconference will be recorded and passed over to the investigators within the bank and the process of investigation will be supervised by independent party as already reported in the newspaper. Don't wait. Read thru some of the comments given by the investors and you can find all kinds of evidence that you can use for your complaints.; October 01, 2008 5:55 PM
Anonymous said...: just read the reply of DBS's VP to the channel NewsAsia's letter 'Watch this High Note as well' , my anger is no less than when the RM called me that my investment in High Note 2 would turn to zero if there were 5 credits events in their so called CDO. Now that it is not a low risk product, how can DBS give us an interest rate of only 4% while cash funds also provided a return around 3% when HN2 was launched?

if there is any loss in High Notes 2, the only one who should be to blame is DBS. In thir letter to us reagarding to High Notes series dated Aug 16, 2007, they told us that none of the High Notes has any direct exposure to US sub-prime mortgage-backed secirities, while among the three credit events in High Notes 2, Fannie Mae and Frieddie Mac are two main mortgage lenders. While they were overwheming discussions about the risks of CDOs after the breakout of US subprime crisis, DBS told us they are monitoring the market, the loss was only a paper and not actual losess, encouraged us to hold until maturity. Now they say that they will redeem High Notes 2 early if there were five credit events in the CDOs (wonder by what terms?) of HN2. Just wonder how DBS was montoring the market? How can they transfer all the loss to the High Notes 2 investors while the loss was actually caused by Constellation's wrong judement and decision? In the DBS website, the DBS CEO is still saying that "DBS's direct exposure to Lehman is insignificant", their "balance is strong". What a shame!

The half-yearly letters stating the value of the Notes are also misleading. I remember some time this year, the value of HN2 was still above 90% of the principal, reenforcing the letter sent by DBS stating that High Notes 2 were still safe. Suddenly it dropped to around 18% and there wer already 3 credit events in the CDOs... Since it is a so fluctuating product, DBS should clearly state it as a risk factor in the pricing statement.

All the messages send by DBS gave us an impression only if the reference entities are safe and we hold until maturity, we will get back our principal. Suddenly they change their sayings. Is there still any trustworthiness in DBS?; October 02, 2008 1:56 PM
Anonymous said...: I have DBS High Notes 3. Now it dropped to 80%. One of the reference entities is ABN Amro which is related to Fortis. I have checked with DBS RM if this can cause Credit Event for ABN Amro. But RM could only reffer this to his higher management and I have not got any answer from DBS since then. Shall I sell it now before it goes further down like High Notes 2?; October 06, 2008 11:45 PM
Anonymous said...: I think WT needs to read a bit more about CDO and tranching before jumping off to a conclusion re:"This is akin to call a basket containing a mix of some copper coins, alluminium coins and gold coins a basket of gold cans! This is grossly misleading!"

cheers; January 16, 2009 10:29 AM