Tan Kin Lian's Blog: High risk of credit linked notes

Tuesday, November 18, 2008

High risk of credit linked notes

When we invest in a corporate bond, we take the credit risk of one company. If the company goes bust, we lose our invested sum.

When we buy a credit-linked note, we take the risk of 6 to 8 reference entities. If any reference entity goes bust, we lose our invested sum. The risk is mutiplied 6 to 8 times.

In addition, we take the risk of 100 or 150 underlying assets. If a certain number goes bust, we lost our invested sum. This may double the risk of the reference entities.

In all, the risk of losing our invested sum can be 10 to 15 times of the risk of 1 corporate bond. What do we get for this high risk? 5.1% per annum.

Did the sales materials and propectus describe the risks transparently and fully? They did not. In fact, the sales materials were written to mislead the investor. The propectus was not intelligible to the ordinary investor.

The only statement that is readable is "You can lose some or all of your investments on a credit event". This statement applies to most types of investments. It failed to disclose that the risk is 10 to 15 times (or whatever is the correct level of the risk) of the failure of one bond.

Under the Securities & Futures Act, it is an offence to give misleading statements or to hide relevant facts when selling securities to the public. I hope that the authority will take the financial insitution to task for breach of this Act.

13 comments:

Larry Haverkamp said...: Hi --

I think this is a good angle to try.

The issuing banks may feel compelled to explain why they are not in breach of the act. That would be interesting.

Sincerely,

Larry Haverkamp; November 18, 2008 12:34 AM
AlphavilleSG said...: Hi Mr Tan,

I think you left out the fact that Pinnacle Notes 9 and 10, are sold with headline claims that the reference entities are sovereign governments and blue chip GICs, what the investors didn't fully comprehend was the clause that states, in the event of a 'Mandatory Redemption Event' of the underlying assets (the CDOs), you are equally likely to loss your entire principle.; November 18, 2008 12:55 AM
Anonymous said...: This is precisely the point! The dividend paled in comparison with the risks! It has been pointed out umpteenth times and yet MAS and our well regarded authorities still have the audacity to pass light hearted remarks. As an unfortunate victim of the CLN, I came to know of the 100-150 synthetic CDOs only recently and not at the point of putting my signature on the dotted line. The risks magnified by the baskets of CDOs were not at all explained! Witholding of such vital information is tantamount to deception.; November 18, 2008 1:52 AM
Anonymous said...: Any1 know how much is the total claim amount for individual investors? We heard town councils.

How could this sink in so deep? Must be FAT commission that lure so many RMs into this push-selling-schemes.

Allowing this wild fires burn and burn...and allowing all the dirty stories to emerge...why not garment create a scheme 20-years paper, one shot settlement for needy people,instead of letting the issue carry on. Let's this be a bitter lesson in a nation building and stop thousands of buyers and RM-sellers, or the banks' top management suffering sleepless nights. Cut it off and keep the productive people march on. Unless we dare to scold our big bros in US.
Lawyer may not like this.
1.Create a special compesation bond by MAS Subscribe by Govt, banks.
2. bankers subscribe according to their investors total amount claim by investors.
3.Govt take up 50%. unless the scale is ten of billions. WHat is few hundred millions vs these killer wild fires.
4.This can save the bank book from written off and sink their share price.
where would this money from?
Let our creative bankers think about this ...They know where to find the money.
Govt goes on the next 100 years. many people saving if gone, very siong one. Let them have their money and be happy for their rest of their life.
The question now is...shuld we catch the Master of the masters?
Should we trust AMERICAN BASTARD bankers? Who bought these products in?
Money comes and go.
Trust and fate take years to build up.
We got so many smart people in the banks, they know what to do.
Why waste ten or hundred or millions of productive hours sorting out the mess?
American BUSH Govt had failed, he failed his Party and his people, failed the world and failed the fate and the trust of the world. By allowing TOXIC CDOSs exporting to the world. These bankers and the financial regulators must be equally responsible.
But on what basis our smart bankers trapped?
The EX-DBS CEO chicken out. He probably knowmore than anyone else...Summon him for an inquiry.
//WTF; November 18, 2008 5:13 AM
Anonymous said...: Good summary of the risks in simple, concise language.
Now FIs also admit that these are risky products in the scale of 8 to 9 out of 10.
We hv clearly been misled.

Why not compensate the victims and move on?? The amt to the big corp. & the FIs are not big.
Why spend so much time, effort and productive hours, and created more distrust and mis-understanding? As pointed out by Mr. Tan, the victims are not greedy. They agreed they hv to share some resp.
Find a solution to satisfy everybody & move on!!!That wld be a win-win situation.; November 18, 2008 6:50 AM
Anonymous said...: Dr Teo Ho Ping has said that the town councils' exposure are S$16M.
There are more question to be answered. Did the town councils went into this with their eyes open? If yes, then someone in town council have to answer for this mistake. The risk that it take did not justify the return. If no, then he should get the bank to compensate for mis-represent.; November 18, 2008 10:40 AM
Anonymous said...: For Pinnacle 9 & 10,
They use Singpaore to cheat people and cover the dirty CDO risk. Doesn't SIngpore need to fight for its reputation?; November 18, 2008 11:38 AM
Concerned said...: Those greedy investment bankers keep churning out credit linked products one after another and our FIs just rolled them out to unsuspecting investors. Don't FIs have the in-house experts and their lawyers to evaluate those products before rolling out to the public ??? Either those so-called experts and their lawyers are dumped or not honest with themselves or they are more greedy of the profits to be made.; November 18, 2008 12:32 PM
Anonymous said...: In legal terms, anything signed is not deemed to have any misleading statements

there could only be misread statements

Because any questions should have been clarified BEFORE confirmation is signed; November 18, 2008 1:00 PM
Anonymous said...: We did not sign the "misleading statement". We were presented with the misleading statements. We did not sign the Prospectus- we were given the prospectus.

You got your law all mixed up.; November 18, 2008 9:52 PM
Anonymous said...: First of all, a big thanks to Mr. Tan for the concise explanation. These pinnacle notes are in fact such risky investment with merely 5.1 ~ 5.2% per annum. Looking like we were really crazily stupid to buy, or unless if we were misled. Someone big shot recently said we were greedy, you know.; November 19, 2008 12:46 AM
Anonymous said...: "Anonymous Anonymous said...

We did not sign the "misleading statement". We were presented with the misleading statements. We did not sign the Prospectus- we were given the prospectus.

You got your law all mixed up.

9:52 PM"

oh is it the way you put so? is it

well then that case i see you'd have no problem getting your refund

you did, or did you?; November 19, 2008 8:57 PM
Anonymous said...: "Someone big shot recently said we were greedy, you know."

Hes not really THAT far off the mark , you know; November 20, 2008 9:24 PM