Monday, October 13, 2008

HK legislators criticize regulators over bonds

Monday October 13, 2:51 am ET
By Min Lee, Associated Press Writer

Hong Kong legislators criticize regulators over Lehman-backed bond fiasco
HONG KONG (AP) -- Hong Kong legislators on Monday accused regulators of failing to monitor banks that sold Lehman Brothers-backed bonds that have put hundreds of millions of dollars in doubt after the U.S. investment bank failed amid the global financial crisis.

Hong Kong's Securities and Futures Commission estimates outstanding value of Lehman-related investment products in the city at about $2 billion. Hundreds of Hong Kongers are worried about the state of their Lehman-related bonds after the company's collapse, and have held protests and demanded compensation.

Billions of dollars in souring debt forced Lehman Brothers Holdings Inc., once the fourth-largest investment bank in the U.S., to file for bankruptcy last month amid the world's worst financial crisis in decades.

In a full-day hearing on the issue Monday, Hong Kong lawmakers questioned if officials had made sure banks properly explained the risks the bonds carried. Investors -- among them retirees who invested their life savings -- have complained that bank salespeople were misleading.

The chief executive of Hong Kong's de facto central bank, Joseph Yam, said the Hong Kong Monetary Authority had asked banks to classify as high-risk bonds that involved complex collateralized debt obligations, or CDOs, after the U.S. sub-prime crisis broke out last year.
CDOs are securities backed by underlying bonds and other fixed-income assets.

Pro-government legislator Lau Kong-wah questioned if the move came too late.
"Many people had already bought the bonds. Some citizens shifted their life savings, all their timed deposits to these bonds. You only told people these are high-risk products at the end of last year. Isn't that belated awareness of the problem?"

Yam responded that risk levels change, noting the bonds were not considered high-risk before the sub-prime crisis occurred. He said he repeatedly warned the public about the risk of financial investments.

Opposition legislator Lee Wing-tat asked if the bonds should be called bonds at all, giving the false impression that they are safe investments.

Securities and Futures Commission Chief Executive Martin Wheatley disagreed, saying it is incumbent upon investors -- and bank staff -- to explain the risk of the bonds.

"I would be shocked if anybody bought a product based on the name of the product. The requirement is to understand the features of the product," Wheatley said.

"Anybody who is offered via bank staff a product that pays 6 percent rather than half a percent on deposit, they should be asking, 'why?'" he said.

Last Monday, the Hong Kong government announced a scheme under which local banks and distributors of Lehman-backed bonds would buy back the products at a value to be decided on.
He Guangbei, chief executive of Bank of China (Hong Kong) Ltd. and chairman of the Hong Kong Association of Banks, said the banks welcome the proposal and are studying how it can be implemented.

Financial Secretary John Tsang, however, said the government will not reimburse investors. "It's not fair to the taxpayers," he said.

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