Friday, October 03, 2008

High risk investments

Dear Mr. Tan,
We the investors can not thank you enough for investing your time and effort in helping us to organise ourselves as nobody else in Singapore would so far.

I am not optimistic that we will achieve anything as we are facing very large financial institutions that have a lot of fire power.

The key to me is in two areas that

1)The sales aid materials and the "misleading prospectus". These are the written evidence. Otherwise the selling process is all verbal between the bank employees and the investors and it is difficult to prove one way or the other.

2) The other is the nature of the products which are extremely high risk now that we are aware of. Even a straight forward product like a local company bond, the retail investor has no access as you need to have S$250,000 as a minimum to invest in. So all other structure products that are available to the retail investors should have a lower risk level that a straight company bond. The financial institutions should not have sold these structured products to the retail investors.

I have read the sales materials and the prospectus before investing and I thought I was investing in the bonds of the referenced entities and the bonds are safely kept by the trustee bank HSBC. Now I know better.

I was prepared to take some risk as I believed that since there are several referenced entities, one failure will only hit the investment proportionately. I never expected that Lehman who is an arranger can wipe off my investment!

REPLY
The financial institution that sold the structured product to you has the responsibility to know the nature of the risk and to advice you appropriately. If they fail in their duty, they should make suitable compensation.


1 comment:

Tiang said...

Dear Mr Tan,

The focus appears to be on uneducated uncles and aunties. But educated people are not in a better position.

I believe that for most investors like me who had bought through securities firms, the product features were explained by Lehman Brothers staff. We are prepared to take risks and accept losses in the stock market because we know exactly what we had bought and know what the risks are. What we strongly object to in the minibonds situation is that the risks were not clearly explained to us.

What we were told were:

(1) Risks are linked to the Reference Entities(RE). (A large part of the presentation was devoted to the strength of these companies)
Implication: We need only to evaluate and monitor these entities.

(2) We would get the value of the underlying securities should the RE fail or we wish to liquidate before maturity.
Implication: We need to know the value of the underlying securities only if we wish to liquidate before maturity or if they have to be liquidated due to the failure of any of the REs. Even then, the value of the underlying securities of those unaffected RE should still be substantial. We were not at any time warned that these securities are similar and that if one fails, the other underlying securities would be similarly affected. In effect, it is putting all your eggs in one basket. Which investor would want to do that?

(3) We will not be kept informed of what the underlying securities are and Lehman Brothers have the right to substitute the securities at any time but these would be at least of similar rating or better.
Implication: Lehman Brothers would be monitoring for us and if one gets downgraded, another one with better rating would be substituted.

The fact that we will not be kept informed of what the securities are and will not be updated if there is any change implies that we need not evaluate how risky they were as they must be of a certain minimum rating. (They took pain to explain that they are of investible grade and hardly any security with that sort of rating would fail.)

We were surprised to hear that we will not be given more information about the underlying securities as this is the first time we have encountered such a product but since this product had been approved by MAS for sale, we therefore thought this is an accepted industry practice for such a product. Further as the yield is so small and as we thought it is a bond-like instrument, we were not expected to evaluate the underlying securities. It is like buying a unit trust: we need not evaluate the securities the Fund Manager buys into.

We had no idea that the underlying securities were linked to the subprime problems.

Why were we not informed of this? There is something fundamentally wrong about the packaging of the product. How can a mother know that the milk powder is tainted unless AVA investigates? How can minibond investors know that we were investing in toxic investments unless MAS investigates ? If caveat emptor applies to minibond investors, then it should equally apply to the mother who buys tainted milk.

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