Saturday, November 15, 2008

Complexity of Credit Linked Notes

Dear Minister Mentor

An investor asked me to send this letter to you. I hope that you can find the time to read it. Thank you.

Dear Mr. Tan

I do not understand how MM Lee has come to conclusion that Minibond investors invested with their eyes open. Many financial experts have expressed their views that the minibond products are too complex for any ordinary investor to comprehend. The following are quotes from the financial experts:

1. Mr. R. Sivanthy, business times senior correspondent : (Straits Times 20/09/08) If you want a front-row lesson in first-class financial obfuscation for structured products, then look no further than the way the recently collapsed Minibond Series 3 notes were packaged and marketed.

Up to $200 million of these notes were sold to a gullible public who probably thought they were buying a five-year bond issued by six leading banks that paid a 5 per cent coupon per year, but were in reality not only exposed to the United States housing market but also to a complex credit default swap arrangement whose substantive party was the now-bankrupt Lehman Brothers.

Moreover, while it is possible to piece together the actual substance of these notes from the documents available, it is a tedious process and arguably not within the ability of the average retail investor.

Finally, if disclosure was weak, then so was knowledge among distributors. Some brokers did not understand the true nature of the instrument and sold it as a bond. Maybe the name had something to do with it, though as investors have now found out painfully, what they had bought was not a bond but a convoluted swap-based instrument.

2. Mr. Tan Kin Lian, former CEO of NTUC Income (Weekend Today, 04/10/08)
Mr. Tan interest in such credit-linked securities did not come about only now. It began when they first appeared on the market two years ago. With the help of another financial analyst, he had studied such products closely. The complex way in how these products were structured baffled him.

When financial experts who spent many hours to read the prospectus could not figure out what the structure was. How can you expect the general public who were sold these products to understand the risk that they were taking?

Even Mr. Tan was shocked with extent of the risks involved. “I became horrified to learn the true nature of the structure and the extent of the high risk”

3. Professor Ivan Png, National university of Singapore (Sunday times 26/10/08)
The Lehman bankers who designed this products were not only smart in finance, they were also geniuses in marketing. They gave the name “Minibond Limited” to the special purpose vehicle that issue the notes. So the shorthand name for the credit-linked notes issued by Minibond was simply “Minibond”. But of course, the notes were not bond at all. It took me quite a few hours to pieces together an understanding of the structure notes from the pricing statement.

I cannot guarantee that my understanding is complete and you may not rely on it as I am not a financial adviser.

The other condition is more difficult to understand. According to the pricing statement, the synthetic CDO was some how based on a portfolio of 150 securities and the value of the CDO depended on those securities.

The pricing statement did not disclose the identities of the 150 securities referenced by the synthetic CDO.

Complex? Absolutely.

4. Associate Professor Low Buen Sin, Finance at Nanyang Business School. (Sunday times 26/10/08)
Are structure products very complex instruments? Yes, they can be. Some structured products are not easy to comprehend even for very seasoned wealth managers. Let us use credit-linked structured products that are similar to Minibond and Jubilee Series 3 as an illustration of the level of complexity that it can get to.

5. David Gerald. SIAS’ president and CEO (Weekend Today 2/11/08)
While some of the conditions are straightforward, understanding the entire 54-page document requires advice from a professional.

It is clear that having considered the document in it totality, that the structured products in question are not suitable for ordinary small investors especially for the “vulnerable group” unless they have sought professional advice or understood the prospectus and the document.

6. Associate Professor Lan Luh Luh of the National University of Singapore’s Department of business policy. (Clarification from Dr Lan Luh Luh 03/11/08)
I mentioned that I never invest in things I don’t understand, because many of these structured products are really, really very complex.

I also mentioned that there should be more stringent requirements as to the qualifications of these financial managers – from the Lehman episode, it can be seen that quite a number of them did not even understand the products that they were selling (which I found out as well when I talked to some of them on many previous occasions).



Anonymous said...

Again this is NOT fair entirely.

All these comments can be adapted into any analogy of a Sell-Buy process

The Sales Person can talk as much and as keenly as he or she likes, as long as the Customer believe he or she DOESNT understand what he or she is buying, then DONT PAY!

The only glaring difference in this fiasco is that in this case, the Customer strongly (and obviously) BELIEVE he or she DID. Because EVERY piece of submissible evidence points to that conclusion.

The ONLY contrary exception is your so claim 'statutory declaration' filed just about now that you were actually under some sort of pretext of duress, going as far as influence of fraudmanship, and all of which in hindsight at this time of poorly performing markets.

It simply baffles anyone, just how do YOU complain about something that YOU had been so certain about that YOU added in YOUR signature, but now proclaim YOU actually wasnt at all?

What if those very articles you said you falsely paid for experience dramatic increments in value the day you walk out of Court having won your appeal of Refund

So are we to register your next new case then should you turn around and decided that hey you actually DID buy them??

How? Which is the REAL "actually"?

Everlearning said...

I doubt MM Lee bothers to read and provide his advice. He has said you walked in "with eyes open".

As an appointed Special Advisor to Citigroup, USA, MM Lee has more important issues to deal with at present moment where Citigroup's existence is at stake there than our problems.

What else is there to do after all that has been done by the poor investors.

Everlearning said...

Quote: "Citi doesn't have a credible management team, they don't have a credible board," said Christopher Whalen, managing partner at Insititutional Risk Analytics. "If you look at their loss rate, it is almost inevitable that Citi is going to be asking the government for more money next year." - The New York Times, Nov 13, 2008.

Banks have turned to Beggars. Sorry I have to say that, but it is so very real.

Anonymous said...

But investors signed a document saying they read prospectus and understood it.

In case of uneducated people, clear that they did not understand prospectus.

If you educated, and don't understand why you sign lol?

So issue of misselling, misrep is for investor to prove

But difficult to prove individually.

That is why TKL etc petition MAS to investigate.

And that is why HK Legco investigating distributors.

Both trying to help the "little people"

Anonymous said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Anonymous said...

Well done Mr. Tan .

Keep trying till MM ( or SM or PM ...) calls you for yr briefing
on 'toxic structured products', 'mis-selling and mis-representation' and 'its negative impacts on local FIs'retail-customers'

Anonymous said...

If MM Lee says so, it must be so, because his weight outweighs all those mentioned, put together.

Anonymous said...

How can you forward the letter of a person who don't even dare to reveal his proper name to the MM? Please don't waste his time.

Anonymous said...

One approach to take when going to court is to convince the judge that the distributors do not understand the product themselves. A competent lawyer should know how to go about showing the distributors up in court.

The distributors know that they are not up to scrutiny regarding these products.

For all the bravodo exhibited by Mr Koh Boon Hwee, DBS is now praying and hoping that High Notes 2 does not go down the drain as well.

Anonymous said...

When RMs oversell on the good stuff and undersell on the risk, most eyes will become 'wide open'... isn't that always the case? Would MAS consider that as mis-selling?


Anonymous said...

Singaporean has lost Total of $665 million lost on Lehman Related products. This is people HARD EARNED Money that they have worked many years. If the government don't say or do anything, nothing will happen, think we all know that.

Let's move on, but history will repeat itself.

8000 retail investor - $375M
Institution investor - $133m

DBS High Notes
1400 Retail Investor - $103M

Jubilee Series 3
350 retail investor -$23M
Institution investor - $5M

Pinnacle Not 9 & 10 - $26M

Anonymous said...

"If the government don't say or do anything, nothing will happen, think we all know that."

Is there anyone in power has any conscience? I still have faith that someone up there has good human nature, like that shown by Mr Tan. So something will happen, though in a snail pace.

Anonymous said...

$665 million and counting........

Best Regards
Split Personality

Anonymous said...

There are $133mil worth of S'pore institutional investors for miniBonds and these are from mostly Town councils, nonprofit making societies who have Accountants to decide on where they put their money safely. Theses credit linked Notes are not sold with risks clearly explained. So to say many invested with "eyes opened" is clearly a big slap on the faces of the Finance professionals who run these institutions and what do you expect ordinary folks to do?

Anonymous said...

R Sivanthy? You must be kidding. Even in his daily analysis of the stock market he also gets it more wrong then right.

Anonymous said...

MM will read this with his eyes closed
Not one MP is taking up the case, you know where your votes have gone to
Next round, just vote with your eyes open

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