Tan Kin Lian's Blog: Profit margin in creating the structured product

Monday, October 27, 2008

Profit margin in creating the structured product

Comment posted in my blog

I am greatly sadden by the losses sufered by the HN5 investors. As an insider, I understand that the sale of high notes products was a highly profitable business for the bank. The product is doubly leveraged - the first-to-default risk and the underlying collaterialsed debt obligation.

Even in early 2007 where credit risk is severely underpriced, the return for the risk undertaken that is passed to HN5 investors borders on ridiculous. The bank keeps a fat margin.

I would suggest HN5 investors ask the bank to oepn its book on the structuring profit for high notes products.

Even if the bank refuses to compensate the 'non-vulnerable' investors, the bank should not be allowed to make money from them.

It also seems that the bank is not so truthful when they said that they were caught unaware by the collapse of Lehman Brothers. i understand that bank had bought CDS protection to hedge the bank's own exposure to Lehman, and have avoided trading with Lehman to reduce counterparty exposure as early as 1Q2008

I know this would drag DBS profit and shares price down further, but my guilt does not allow me to keep quiet.

REPLY
The Petition #1 ask the Government to investigate the creation and marketing of the products. In my supporting document, I asked the Government to look into the accounts for the structured products to see how much money is taken away by the product issuer and the marketeer.

I hope that MAS will pursue this matter. If not, I will ask a Member of Parliament to raise this matter in Parliament.

13 comments:

Anonymous said...: Banks still offer Lehman's Minibond Series 9 and 10 as recently as July 2008! In fact the Sunday Times 20 July 08 Invest section even list it together with OCBC Class B Preference Shares as alternative higher returns to FDs!!

So you see, put it as if in same category as bank preference shares paying 5.1% dividend! Who wouldn't be taken in?; October 27, 2008 8:39 AM
Soh Kok Hong said...: I did not invest in any of these structured products. But after reading the Sunday Times articles, I am troubled that the banks did not reveal to investors pertinent information to help them make informed decision. This is worse than mis-selling as the banks did not reveal relevant information to help investors make an informed decision.

For example, for the HN5 product, it was mentioned that if 13 out of 150 securities were to default, then the investor would lose the entire principal. This is an important piece of information for any investor to have. If we assume a 1.2% annual attrition rate (less than standard bankruptcy rate of listed companies in stock exchanges), then the probability of losing all your money over a 5-year period is more than 10%.; October 27, 2008 10:19 AM
Everlearning said...: I have been skeptical the ways most of the banks pushed their financial structured products for the past four to five years.

When the U.S. banks started to fail early this year, even the branded investment banks that MM Lee praised were in deep waters, our foreign banks continue, openly marketing their structured products to the elderly folks. Of course, I rejected their offers because I sensed that how could they honour the high interests if they are financially unsound.

Personally, I find that nowadays banks are gambling away our money by not being accountable for the losses. They recklessly use our money to get the kick out of making or losing money on the various vice-investments they got us in. Later, they will tell you off: Too bad, you have lost all. The only way to retrieve your losses is to pump in more money.

Absurd! Broad day-light robbery!
I have very little faith in the ways banks are conducting themselves.; October 27, 2008 10:29 AM
Anonymous said...: Getting MAS to investigate the banks for 'profiteering' from structured products is like asking MAS to admit its inefficiency and mistakes.; October 27, 2008 10:50 AM
Anonymous said...: Just want to share a personal experience. I am a Malaysian working in Singapore & married to a local Singapore girl. My in-law sold their property in 2007 & went to a local bank to deposit the proceeds & they were persuaded to invest in Lehman mini-bonds. Fortunately, I found out about it the same day & I brought them down to the bank to see the manager; I asked them to explain clearly & in absolute details what product has been sold to my in-laws .... they could not satisfactorily explained. Now, I have been an investment professional for more than 10 years & I have gone through the documents myself 3 times & I could not even understand what this product is! Luckily, the bank agreed to void this deal. Shh, lucky.; October 27, 2008 12:17 PM
Anonymous said...: Every FI worth its salt has a New Product Committee which will evaluate the business viability of new products to be sold by the FI.

This committee's scope normally includes the following:

1) the estimated total and net revenue that the FI will earn from selling the product
2) the main characteristics of the product and its market positioning i.e. its structure and similarities to other products within and external to the bank
3) the targetted market - viz, segment, total size, expected capture
4) the key selling points
5) the resources - capital and manpower required to execute the business plan ( will include marketing and training costs, IT systems to be set up,new staff to be recruited etc)
6) the management, market and operational risks i.e. whether the FI has the expertise and competence to launch and sell the product and likely risk factors e.g dependence on market funds, reliabilty of business partners,etc

For the group meeting DBS management, instead of just answering the FI's questions on the investor's experience at time of sale they should press the FI for info on how thorough was the evaluation by this New Product Committee. Specifically they should demand to know if the "champion" of the product had highlighted in the proposal that the product will appeal to cash rich investors who can be satisfised with a small incremental yield if "promised" the prospect of safety. Given the testimony offered by deceived investors as well as the profile of some of the "vulnerable investors spotlighted by the media, I would be very surprised that if nothing else that this would have been stressed in the selling kits supplied to the RMs. Lawyers enaged by affected investors should also request to sight all internal bank documentation on the product approval process as well as the product training literature and selling process e.g culling a shortlist from existing bank FD customers with a minimum of $10000 etc. This will enable them to argue more effectively the case for mis-selling, misrepresentation and management oversight if not negligence ( the latter esp if evidence abounds that the FI's Risk Management Unit had taken action to limit their exposure to Lehman Bros whilst at the same time their Consumer Banking people were merrily marketing the HN 5 products to their less informed and financially illiterate customers. Be more assertive at the Town Hall meetings since the head honcho will be there and press him for answers!; October 27, 2008 3:37 PM
Anonymous said...: I read my Product Advice Report again it was mentioned that for every $10,000 invested, Maybank will profit $300.

Those that are still angry will DBS, can buy 1 share of DBS at around $10 per share currently and attend their AGM to voice out in front of the media and other shareholders!; October 27, 2008 4:15 PM
Anonymous said...: As a neutral person, I sincerely think it's WRONG to ask banks to conpensate for the losses of the those 10,000 people who lost their monies in the Struxctured Notes. For the past few months, many investors the world over had lost money in stock markets, unit trusts, property investments, commodities, etc.
WHY SHOULD STRUCTURED NOTES INVESTORS THINK THAT THEY SHOULD BE IMMUNE TO THE WORLDWIDE FINANCIAL CRISIS?? LEHMAN BROS' COLLAPSE IS ACTUALLY A ONCE -IN-A-LIFETIME EVENT,IN WHICH NOBODY HAS ANTICIPATED!! PLEASE WAKE UP!!

INVESTORS SHOULD KNOW VERY WELL THAT NOWADAYS, THERE ARE FINANCIAL CONSULTANTS STATIONED AT EVERY BANK BRANCH. SO WHEN THEY ARE APPROCAHED BY THESE SALES PEOPLE TO BUY UNIT TRUSTS OR STRUCTURED NOTES/DEPOSITS, INVESTORS SHOULD BE MORE CAREFUL AND NOT FALL INTO ANY SALES TALK .
IF THESE SORE INVESOTRS OF STRUCTURED NOTES ARE NOT GREEDY OOF THE 5~6% INTEREST, THEN TODAY WE WOULD NOT HAVE SUCH A BIG HOO-HA OVER THIS ISSUE!!; October 27, 2008 4:58 PM
Anonymous said...: If DBS had used customer money to protect its own exposure and in the process made money from the arrangement, DBS has committed a crime selling these high notes. I don't think even DBS dare to do this. People will go to jail if that is their game plan to knowingly sell dangerous products to customers to protect themselves.; October 27, 2008 5:48 PM
Anonymous said...: 4.58pm,
either you just woke up or your brain hasn't been working that you haven't understood the issue. Let me fill you in.These people were MIS-SOLD and MISREPRESENTED by RMs using unethical approach that breached the law that resulted in loss.I wonder you have elderly mother or father who makes visit to the bank and lured into putting their money meant for fixed deposit but landed up in a false fixed deposit because of RM's misrepresentation. if these people knew waht they were in for they would blame no one. It is just like walking into a casino you cannot claim you do not know or you have not read the casino's prospectus. In the case of the bank the investors DIDN'T KNOW they were walking into a casino in the bank. The croupiers or RMs didn't disclose the risk of this game, the miniBOMB game .It is not about investing and misjudged the investment.
Lastly, you aren't neutral. You are
blur.; October 27, 2008 6:50 PM
Anonymous said...: i agree with neutral. the collapse of lehman is something that happened out of the ordinary. there was no intention to mislead. the disributors prob didn't count on lehman failing. y should the investors be compensated?; October 27, 2008 10:17 PM
freeier said...: let's put it in the correct perspective, as a structurer/trader, there are thousands and one way for one to put the CDOs at values that ended up me not making any margins from the HN5. So asking for the profit is just not useful and not indicative of anything. Wld make them appear nicer than they actually are as well.; October 27, 2008 11:52 PM
Anonymous said...: A friend is a product specialist in a local bank. He mentioned Lehman people came to Singapore from the US & presented their product, Lehman mini-bonds. As a specialist, he could not quite understand this product himself. However, his boss over-ride his assessment & pass this product for sale through the retail channels...he thinks the boss (foreigner) is more interested in his year-end bonus than the interests of the bank's customers.; October 28, 2008 8:41 AM