Tan Kin Lian's Blog: Credit default of Pinnacle Notes Series 9

Monday, November 10, 2008

Credit default of Pinnacle Notes Series 9

Dear Mr. Tan,

We were notified by Elgin Ting of OCBC securities that redemption event may shortly occur for Pinnacle Notes Series 9 as a result of credit events. This is urgent and of paramount importance for those who are exposed to it.

Before allowing the redemption to happen, can MAS, SIAS or other professional bodies help look into the matter instead of letting the arranger (Morgan Stanley) call the shot? Can it be saved?

I'm befuddled by the horrendous risk factors stated in the letter relating to Synthetic CDO Securities, CDO Squared Securities, Credit Commodity linked Securities and Asset Backed Securities. Please help post this in your blog.

S8Neo

REPLY
You can oranise a collective letter to be sent to MAS, if you wish.

Before you do so, you can check the facts. I believe that a credit event occurs when a certain number of the underlying assets have failed - in accordance with a key term of the structured product.

When this happens, the total amount invested is used to pay the counter-party of the credit default swap. This is like paying an insurance claim - when the insured event occurs. In this case, the investors of the structured product is the insurer of the event and the swap counter-party is the recipient of the payment.

Many investors are shocked that they are exposed to this type of risk - which they were not propertly informed at the time of their investment. In additional, they were also exposed to the risk of default of any of several reference entity.

These types of risks apply to all the other "credit linked notes" as well. Some have failed now. The others may face the same outcome later. If they are likely, they may avoid a credit event.

37 comments:

Chan J C said...: Hi

I am an investor of the same Pinnacle series 9. It is true. I also have an email from Morgan Stanley stating that they are waiting for the "something like" recovery rate of the Icelandic banks as they are in the list of the CDOs baskets, and it is very likely that it will default in the coming days.

I have just sent my complaint letter to my FI - OCBC Securities yesterday. I am also waiting for Mr. Leonard Loo to response to me to see if we can have a collective legal action.

If you want, you can write to me at joo_chong@yahoo.com; November 10, 2008 9:24 AM
Anonymous said...: What the

WHEN DID ICELANDIC BANKS COME INTO THE PICTURE SUDDENLY?!; November 10, 2008 9:44 AM
Anonymous said...: I read the Pricing Statement for my Minibond Series 3 more closely yesterday and noted that "you will not know exactly what the underlying securities will be" at the time of purchase.So it's not surprising that the Icelandic Banks suddenly prop up in Pinnacles Notes 9. So the risks are there but yet not there!!; November 10, 2008 10:41 AM
Chan J C said...: Good question! It is all listed in the CDO basket. And I only got this list last week from OCBC Securities.

Dear Mr. Tan
Do you think this is mis-selling? We were absolutely not informed of such things during purchasing process?

Thanks for your kind reply.; November 10, 2008 10:42 AM
Anonymous said...: Investors should be aware about the icelandic risk; November 10, 2008 11:07 AM
Anonymous said...: This Pinnacle CLN series 7 is for your reference:

List of CDOs: 125 names

Already failed:
Ferddie Mac, Fannie Mae, Lehman Brothers, Washington Mutual, Glitnir banki & Kaupthing banki.

Recovery rate:
Ferddie Mac - 98%, Fannie Mae - 99.9%, Lehman Brothers - 8.625%, Washington Mutual - 57%, Glitnir banki - 3% & Kaupthing banki - 6.625%.

Similary to DBS HN2, any early redemption may be called if it's subordinate level breaches 4.60%.

At present, the aggregate loss is already 2.75588%

Freddie 0.8% x 0.001 = 0.0008%
Fannie 0.8% x 0.02 = 0.16%
LB 0.8% x 0.91375 = 0.731%
WaMu 0.8% x 0.43 = 0.344%
Glitnir 0.8% x 0.97 = 0.776%
Kaupthing 0.8% x 0.93375 = 0.747%

There is one more failure in iceland Bank Landsbanki and the recovery rate is only 1.25%

If Series 9 have all the Series 7 failed CDOs and Landsbanki, it is now in a precarious position.

I may be wrong in my understanding, please check with your respective FIs and their FA/RMs.

Rgds!; November 10, 2008 12:16 PM
Anonymous said...: Thank you very much for 12:16pm. Where did you get these information? I tried many times what is the recovery value for those defaulted names in CDO list, OCBC secruities just reject to tell me.

What a terrible nightmare that we have to link all of these unknown parties to our money.

They still say we are not cheated, the broker from OCBC said even the minibond's name is not misleaded at all because he was not misleaded by the name since he know it is not a bond at the first beginning.; November 10, 2008 1:44 PM
Anonymous said...: I have bought Pinnicle 2, just waiting for my day to come and can't do anything, that is terrible!; November 10, 2008 2:30 PM
Anonymous said...: Does anyone know how much is Pinnacle 5 now? Is it going to default like series 9?; November 10, 2008 2:33 PM
Chan J C said...: I suggest we can meet at Weekly Speeches at Speaker's Corner this coming Saturday and share more information with each other.

Regards
JC; November 10, 2008 3:38 PM
Anonymous said...: My confidence in MAS and the FIs has diminished to the point of no return. I sincerely hope Morgan Stanley being the arranger will do whatever it can to prevent the liquidation of Pinnacle S9. Liquidating it now at FIRE SALE VALUATION IS VERY UNFAIR TO ALL WHO HAVE INVESTED IN THIS NOTE. Ben Bernake himself was very concerned about valuation at fire sale price during the crisis when he faced the congress to rally for the $700b rescue budget. The whole investment community will be terribly shaken if another of these credit link products is allowed to fail with investors getting NOTHING back. I appeal to the senior authorithy of Morgan Stanley to seriously look into alternatives to save or delay the onset of liquidation till the financial market returns to sanity for a fair valuation of the affected entities.; November 10, 2008 4:43 PM
Anonymous said...: Confirmed with OCBC securities that Pinnacle 9 has downgraded to CCC-, that means it going to defualt anytime.

Morgan Stantley was asked to set up a hotline, but I do not know how true it is?

Morgan Stantely is going to prepare a Q& A for investors after many weeks request, I am not sure wheterh we can get it by this week. I call them everyday for 4 weeks, but not yet receive anything. That is the only thing I can do so far, to get updated information.

These terrible bankers. Can they enjoy cheated money without any gulity?; November 10, 2008 4:49 PM
Anonymous said...: I think Mogan Stanley is taking this chace to default the notes as they had been burnt badly. By quickly dissolving the notes, they don't have to pay us back when reach maturity, this is the true face of these US banks.

CB; November 10, 2008 5:07 PM
Anonymous said...: If i am a bank about to announce my annuals (salaries and bonuses inclusive) and the Market is chaos out there

now what do YOU suppose I should say about some Notes that i had issued earlier, but fully obliged to fulfill by around this time

hmm; November 10, 2008 6:01 PM
Anonymous said...: Its real irony

I can visualise a bunch of pple outside a building holding signs shouting "REFUND REFUND REFUND"

at the same time i can also visualise a bunch of pple INSIDE the building banging their fists on the table shouting "DEFAULT DEFAULT DEFAULT"; November 10, 2008 6:03 PM
Anonymous said...: 1:44 PM

To know more, go to
http://en.wikipedia.org/wiki/Credit_default_swap

For the list of CDOs, please ask your FI to provide one. Different series there are slight differences in CDOs selection.

I am not able to understand the entire setup. The CDOs portfolio could be reference portfolio having the same function as the Reference entities only that a single CDO failure doesn't constitute a credit event. The is a subordinate level (a laymen term is a buffer) to breach and for series 7 I understand is 4.60%. ie, the underlying assets may not be real again. The money is actually held somewhere and it is more likely involves in another SWAP with another Morgan Stanley like entity eg. JP Morgan Chase credit card.

Having said that it is merely my understanding of the mechanism and I may be wrong totally or partially . Please go to your FI and ask your FA/RM to tell u more FACT!

Rgds!; November 10, 2008 8:16 PM
Anonymous said...: I have asked the RM & Hong Leong two ago to give the list of CDO,until now still no new. By the way, who is the trustee?; November 10, 2008 9:37 PM
Anonymous said...: Looks like Series 9 may have more investors. Reference entities are Australia, HongKong, Spore, Singtel & Temasek.; November 10, 2008 11:09 PM
Anonymous said...: What is MAS and government doing about these? the toxic products are falling one after another! all man in street savings will be wept out soon!; November 11, 2008 10:27 AM
Anonymous said...: Anonymous Anonymous said...

What is MAS and government doing about these? the toxic products are falling one after another! all man in street savings will be wept out soon!

10:27 AM

The way you saying as if these are not anticipated or forecasted. Its giant organisations with hundreds of far reaching departments and thousands more worker bees that we are talking about.

Your shock implied they DONT know a storm could be brewing in their neighborhood?

Really, Truth WILL hurt.; November 11, 2008 11:30 AM
Anonymous said...: Pinnacle Series 1,2,3,5,6,7,9 & 10 are CLNs and 8,12,15 & 16 are ELN. I suppose so based on the latest valuation. Correct me if I am wrong.

PS 7 value has gone down to 3.11% base on last week's weekly update. PS 7's CDO basket has been downgraded to B grade by Flitch. B rating is 'Highly Speculative Grade' and it inidcates that significant credit risk is present, but a limited margin of safety remains.

Learn that PS 9 has been downgraded to CCC grade and default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.

PS 9 was supposed to be a superior CLN than PS 7 as the reference CDOs in the CDOs basket were mostly in 'Investment Grade' (less likely to fail) ie, AAA to BBB so the subordinate level is marked at a low 2.60% as against PS 7's 4.60% (Please check with your respective FIs & their RMs) as what I learned.

PS 9 guys have to act fast before MS call the shot.; November 12, 2008 1:30 PM
Anonymous said...: I'm a PS 10 investor and have also just received a similar letter from HLF suggesting a likely redemption event shortly by MS as the reference CDOs have been downgraded to CCC- !

Can someone advise what can we do ?; November 12, 2008 9:45 PM
Chan J C said...: Complaint to the FI.

Collective legal action - for this, you might want to talk to Mr. Leonard Loo; November 12, 2008 10:59 PM
Anonymous said...: I am a retiree and purchased PS 9 from Hong Leong Finance as the RM explained that the credit risk was on MS and the Referenced Entities which are Commonwealth of Australia, Hong Kong SAR, Republic of Singapore, SingTel and Temasek. There was no mention of credit risks of "Other Underlying Assets". Neither was I provided with a list of these "Other Underlying Assets" at the time of purchase. In fact, the marketing brochure by HLF only boldly emphasized (in Large Capital Font) the Referenced Entities.

The proceeds of the purchase was from from my fixed deposit with HLF which had matured on the day of the purchase. I am not a risk taker. I was only willing to risk the credit worthiness of the Referenced Entities which include sovereign entities like Australia, HK SAR and SINGAPORE! The RM assured me that the risk was only marginally higher than a normal fixed deposit as the risk of default of the Referenced Entities was quite remote. There was no mention of "Other Underlying Assets".

When I called my RM today she was unable to provide me the list of "Other Underlying Assets".

I feel very strongly that there was intent to mislead buyers of these financial products like me and that HLF should be responsible and liable to compensate buyers like me should MS force a Mandatory Redemption.; November 12, 2008 11:40 PM
Chan J C said...: your situation is similar to mine except I got mine from OCBC Securities. I get to know about this structure from newspaper and from the list of distributor, OCBC name stands out and given the trust of OCBC is stable, I decided to call them to enquire about this Series 9. The sales person explains to me the risk exposure on the 5 REs and assure me that if any of the REs are defaulted then there will loss of money. Further to this, she also mentioned that our money will then be used by these REs to invest into "underlying basket" and technically they are called CDOs.

With this understanding, I am made to believe that the risk exposure is mainly the 5 REs, so I sign on the contract...

Can any kind soul advise if this is a form of mis-selling?; November 13, 2008 10:52 AM
Anonymous said...: PS 9 & 10 CLN holders,

A Primary credit protection arrangment is embedded in the REs - FTD (First-to-default basket).

A Sececonday credit protection arrangment is embebbed in the underlying assets - CDO basket.

Please call MS Hotline to find out more: 68346510/11/12.

Please ask Mr Tan to help.

I heard that PS 9 & 10 have defaulted and MS is about to send out notice on early redemption. I heard the loss is 2.67% and has already in excess of the 2.60% subordinate level.; November 13, 2008 1:02 PM
Anonymous said...: PS 9 & 10 CLN holders:

I understand that the subordinate level for these two notes is 2.60% (Sorry if I am wrong).

Please check the no of names in the CDO basket. 125 names or 127 names?

Please check if these 6 names are in the CDO basket:

Freddie 0.8% x 0.001 = 0.0008%
Fannie 0.8% x 0.02 = 0.016%
LB 0.8% x 0.91375 = 0.731%
WaMu 0.8% x 0.43 = 0.344%
Glitnir 0.8% x 0.97 = 0.776%
Kaupthing 0.8% x 0.93375 = 0.747%

Total loss is 2.6148%

If 127 names,
Total loss is 2.563622%

Rgds!; November 13, 2008 2:16 PM
Anonymous said...: Dear 2:16pm,

How much impact on the principle invested if the subordinate level loss is 2.618%? My fear is a total annhilation of the principle amount!; November 14, 2008 1:35 AM
Anonymous said...: Hi 1:35 AM,

I suppose it is the job of the trustee or expects engaged by the trustee. Don't think FIs can tell much. I suppose they too rely on the report by MS's analyst. I read something about calculation agent and/or rating agent working on it using mathematical model encompassing principle of probability & Present value of cashflow received.

PS 1,2,3,5,6,7, 9, 10 may not be so troubled by the swap counterparty (MS) & FTD basket (5 to 8 REs) at the moment but NOT the CDOs BASKET which is of CRITICAL concerned ever. PS 6 & 7 concern, my understanding is that there is a CDS transaction with the underlying assets involving JP Morgan Chase credit card (that is all I know).

I was told that PS 9 & 10 were given a subordinate level of 2.60% by rating agent. As for PS 7, it is 4.60. I was told that PS 9 were superior than PS 7 in that most of the reference entities were in 'Investment Grade'.

Perhaps the no of REs in FTD basket play a part. 5 REs mean 5 times leverage and 6 REs 6 times ( my conjecture, need finacial expert to advise).

For PS 7 default will start when the 4.60% subordinate level has been breached. It is the 'Attachement Point' in Schedule C Terms of Transations in one 324 pages ACES thingy, and the value will become ZERO when it reaches a 'Detachement Point' in which 5.35% is given to PS 7.

PS 9 & 10, I believe they have gone below the 2.60% subordinate level and a default I believe have already taken place that MS is about to call the shot.

U need to quickly call MS hotline: 68346510/11/12 or your FI to know more.

Rgds!; November 14, 2008 9:17 AM
Anonymous said...: Hi Victims,
My wife and I are exactly facing the same situation and same boat as the victim who blog at 11:40pm.
We were only told that "only if one of the Referenced Entities which are Commonwealth of Australia, Hong Kong SAR, Republic of Singapore, SingTel and Temasek goes bankrupt" then it will affect our savings. The Financial Manager has MISLED us. We are also very low risk taker. I think they are all out to cheat us. We are in a lost now.
Me and my wife will be going to Hong Lim Park speakers corner to seek for advise from Mr Tan KL this Sat 15 Nov 08. Hope that all victims can bring along all friends and relatives to help us to voice for justice.
Thank you and God Bless Us.; November 14, 2008 4:04 PM
Anonymous said...: Looks like it's offical now. Just heard from news that MS informed investors of PS9 & 10 likely to lose all their investments due to credit event from LB, 2 Icelander banks !

Again, MAS just advised investors to file a complaint if there is any mis-selling.

Looks like we are stranded just like the minibond investors.; November 14, 2008 10:09 PM
Anonymous said...: Looks like it's official now. We stand to lose all our principal ! Guess most of us were sold on the unlikely credit event of the REs but not informed on the underlying and much higher risk associated with the CDOs. The FI, distributing such a "faulty" product, should bear financial loss responsibility.; November 14, 2008 10:21 PM
Anonymous said...: Morgan Stanley Pinnacle Notes Website

http://www.morganstanley.com/pinnaclenotes/sghome.html; November 15, 2008 12:05 PM
Anonymous said...: I try to work further into the PS 9 & 10 debacle and if I am not wrong, the brief below may help to explain the occurence of the Credit Event.

PS 9 & 10 - CDO basket 100 names.

Surbordinate level assigned by rating agent is 2.60%. Attachment point is 2.60% and Detachment point is 3.67%.

Feddie(Senior) 1% x 0.06 = 0.06%
Fannie(Senior) 1% x 0.0849 = 0.0849%
LB 1% x 0.91375 = 0.91375%
Landsbanki 1% x 0.9875 = 0.9875%
Kaupthing 1% x 0.93375 = 0.93375

Total loss is 2.9799%

MS said in the FAQ dtd 14 Nov 08,
"Given the curent market values of the underlying assets and the credit default swap transation, we anticipate that the investors will lose all of their original pricipal investment."

Market value I heard is about 5% of the capital and may not even be enough to pay for the unwinding cost.

WHAT a CHEAT of these Pinnacle Credit-linked Notes and WHY the honest and obedient Singaporeans are so punished by the GREEDY angmoh and the unregulated finacial system for those virtue they so possess!

Why are the honest and obedient Singaporean so UNFAIRLY treated?; November 15, 2008 1:46 PM
Anonymous said...: Initially I fully have the confidence in Singapore financial system and MAS which achieve world standard. However, It is F grading now due to so many of our citizens suffered huge financial lost due to collapsed of minibond and Pinnacle notes. Why it only happened in Singapore and 2 other countries ?

MAS is remain quite and not helping our fellow citizens.

How can some one claim that investors walk in with eyes open. There are so much of "toxic smoke" every where in the FI. Was the MAS filtering effective ? Need to purge out.; November 16, 2008 12:00 AM
Anonymous said...: Having scrolled thru the comments, the following reply may be useful (left similar comments in another blog):
The Investors in such products generally take 3 types of risks:

A) the 5-6 stated credit events
B) Counterparty risk. In the case of the miibonds, it was Lehman's failure;in this case it is MS, altho this isn't the issue here. The point to note is in such retail products, it was structured that counterparty risks ranked higher than the investor in claims, even in the event of the counterparty bankruptcy. This feature would have been unusual in institutional products.
C) eligible collateral risk. When investor pays for the product, the monies are invested in "safe" assets that will be redeemed at maturity to repay investors, asuming nothing happened. Unfortunately, the "safe" assets they chose were CDO themselves. Yes, they were originally rated AA or even AAA but how clearly was this communicated to nvestors. If I recall, they were in fine prints in the brochures.....; November 16, 2008 10:31 AM
Anonymous said...: I believe most holders of PS9&10 like myself, when making purchase of these financial instruments are aware only of the first 2 types of risks (A & B) as mentioned by Anonymous' 10.31am posting. Had we be made aware of risk C, I am sure many would not have purchase PS9 and 10.

However, like many, I was not made aware by the RM of the "Other Underlying Assets" and the associated risks. Neither was I given the prospectus nor the list of "Other Underlying Assets" at the time of purchase. The RM strongly emphasised that the investment was low risk and safe as there was little chance of default by MS and the 5 Referenced Entities. An average person would normally associate the risks with the returns. After all, the returns is only 5.25%, only 3% higher than the normal fixed deposit then offered by HLF, so it cannot be high risk. That was the message pushed by the RM to divert me from placing a fixed deposit and to purchase PS9.

I called the RM after Lehman Bros declared bankruptcy to confirm that PS9 was not affected as at that time MS was on the verge of going under. The RM confirmed that PS9 was not affected and not in default as MS has not declared bankruptcy and the 5 Referenced Entities were also not in default. The RM at no time mentioned the "Other Underlying Assets" nor its associated risk of default. Until today, even after calling my RM and HLF hotline on 13 Nov., I was not given the list of "Other Underlying Assets". I understand that even though the list is available today upon request, the list was formulated only much later after the PS9 & 10 notes were sold. Is this allowed by MAS? Who is to guard against MS from populating the belated list with toxic assets that MS is trying to dispose of?

I now believe that:

1. The RM and HLF at the time of selling and even until lately before the Minibond crisis are not aware of the "Other Underlying Assets" and its significance and impact.

2. PS9 & 10 are high risk, sophisticated and complex investment products not suitable for the average man in the street like myself. As such, the RM normally a GCE A-level holder or fresh graduate with no formal and special training in sophisticated financial products would not be in a position to fully explain the risks associated with such products and hence is not qualified and should not be allowed to sell these products.

3. There was clear intent on the part of MS to mislead and misrepresent buyers of PS9 and 10 as MS had intentionally and deliberatley chosen the 5 Referenced Entities to be Hong Kong SAR, Australia, Singapore Govt., Temasek and SingTel. It iss no accident nor mere coincidence that MS had deliberately chosen these 5 Referenced Entities and aggressively marketed them while again deliberately camouflaging the risks and the "Other Underlying Assets", knowing full well that these 5 well known Referenced Entities would appeal to the normal man in the street. After all, even the average S'porean knows that the chances of default by SingTel, Temasek and the S'pore Govt. are remote. MS knows this and is using this to intentionally misrepresent and mislead by deliberately highlighting these Referenced Entities while camouflaging the underlying risks associated with the "Other Undelying Assets". MS is abusing and taking advantage of MAS' hands-off and buyer Caveat Emptor policy when marketing and selling PS9 and 10. After all, why then are PS9 and 10 only sold in S'pore and nowhere else?

That MS deiberately choose HLF, OCBC Securities, UOB Kay Hian, Kim Eng and DMG to sell PS9&10 is also no mere coincidence. It is intentional and well thought through with the aim to mislead, knowing full well that the customers of these 5 "securities houses" are not sophisticated investors. I seriously doubt if the RMs of these 5 securities houses, other than HLF, who normally deal with buying and selling of shares on the stock market are in a position to fully understand PS9&10 and advise their customers accordingly on the actual risks involved.

4. MAS is abdicating its responsiblity as S'pore's financial watchdog by stating "it does not have the power to compel FIs to pay compensation to consumers. For cases where there are sufficient indications that the product was mis-sold or that it was clearly inappropriate given the investor’s profile and circumstances, MAS has stated that the FI should take responsibility and reach a fair settlement in full or in part. This has to be assessed on a case-by-case basis." By stating its hands off position upfront, MAS is making it easier for the FIs to not reach a fair settlement. What if this happens? Will MAS then change its position? In the case of the regulator in Hong Kong regarding the Minibonds and High Notes, I understand that there is a committe convened to investigate if there were instances of mis-selling and misreprsentation and if legal actions can be taken to go after the perpetrators of these misdeeds.

I expect that this is the least MAS can do.

Clearly in the case of PS9 and 10, there is ample evidence of intent to misrepresent, mislead and deceit.

MAS must investigate.; November 16, 2008 3:32 PM

Monday, November 10, 2008

Credit default of Pinnacle Notes Series 9

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