Sunday, November 09, 2008

Is this fair?

Contributed by R Williams

Inflation keeps rising … 5 to 6%
Savings rate depressed … 1 to 2%.

Your fixed deposit has just matured, or you have some hard-earned life savings to put to work.

Like any prudent saver, you look for reasonable return, reasonable risk. You were not prepared to gamble with these savings.

You were attracted by promotional literature and bank employees touting " 5% Return ! , … Solid Foundations !, … Low Risks !, … Defensive !, …".

You signed the dotted line, "comforted" by employees from trusted institutions.

SURPRISE ! SURPRISE ! : you have just lost/risked your entire savings, buying insurance you did not know about, and placing bets against the failure of any one of 6 company names prominently marketed to you, but not explained to you that the actual probability of failure is, in fact, multiplied 6-fold, and not decreased 1/6th , or that the risks were compounded to include the failure of 10 of 150 other companies/securities you were never told or heard of. Did you suddenly change your mind and decide to gamble away your entire savings ?

Did the advertisements or anyone from the banks and FIs tell you before you signed on the dotted line that you have actually :

1) bought insurance from, and
2) swapped bets with, Lehman/Merrill Lynch/Morgan Stanley/DBS, and
3) underwrote extremely high risks with 150 companies/securities that were never revealed to you, as an owner of these products, even till today ?

Did you know that when you stepped into the bank or FI, you actually wandered into a CASINO and you unwittingly placed BETS with Lehman/Merrill Lynch/Morgan Stanley or DBS ?

Did you realize that you were not told of the REAL ODDS, unlike in a REAL CASINO ?

Did you know that you were actually buying INSURANCE protecting Lehman and the other banks manufacturing these poisonous products ?

Did you know that you were actually TRADING RISKS with Lehman and these banks ?

Were you blissfully thinking that you were just putting your hard-earned savings to work for a paltry 5% return over 5 long years ?

Were you were expected to be conversant with, let alone learn, esoteric terms like : "counter-party risks", "first-to-default", "credit-default swaps" , "collaterised debt obligations" etc , financial concepts which require deep understanding of complex mathematical models ? You had to be a mathematician, a financial engineer and an actuary ( with a real interest in probability, statistics, risks analysis ) to appreciate even a bit of what was offered, and run through complicated mathematical models to discover the full risks, not just the vigorously promoted false pretense of the "low" risk of 1 of 6 known companies collapsing. Does this not amount to deception ?

If this is the case, and the products were sold through advertisements not highlighting the actual risks of the products, and sales employees not qualified with the above skills, how can loyal and trusting customers be now ridiculed with taunts of "buyers beware" and be told that you are "not vulnerable" ?

If these products require so much specialized knowledge and skills to even begin to understand them properly, how can they be sold like a "commodity" ?

Whose responsibility is it if the mass market is sold "commodity" products which turn out to be cleverly disguised and harmful to consumers ? Should we expect the consumers to suffer the pain and anguish and "move on" ?

"Banks not out to cheat" ?

The housing bubble started to burst in 2006, yet the products were engineered and sold in 2006. In other words, when the products were first sold, they were already "destined to fail right from the start". Furthermore, by selling the products in different Series ( to give the appearance of overwhelming "success", and thereby, sucking in more and more and more victims ) and, to even continue selling in 2007 and late into 2008, with full knowledge of the rotting "underlying securities" ( "liar loans" in US mortgages which made up the CDOs are loans with no chance of repayment as they were given without any proof of income nor collateral ), does this not show intent to defraud ?

Yet, no visible action is being taken to punish wrong-doers, especially the discredited "investment" banks, whereas in the United States, State Regulators and the Courts have been UNIMPRESSED with, and REJECTED the banks' defence of "buyers beware" and " caveat emptor" . Instead, banks there have been fined heavily and forced to completely return billions to individual customers, Municipalities ( Town Councils ), School Districts, etc.

Perversely, over here, lower-level bank employees are now becoming the second wave of victims.

The original victims and their loved ones are the people ridiculed and labelled "greedy" ( for 5% return on savings locked in for 5 long years ? ), "not vulnerable" ( for being under 62 and educated ? ), "they deserve it for trusting people" ( for believing in the banks and FIs ? ), "hard luck" ( for not keeping tape-recorded evidence of conversations, for not disputing what was hurriedly written about them, for not doing due diligence on 85-page prospectuses, for not knowing they were in a betting game of trading risks with counter-parties, etc).

For being simple-minded human beings, the 10,000 victims are the ones punished, trying to be prudent savers. Now, we have a second wave of victims.

Is this fair ?

R Williams


Anonymous said...

i agreed with your arguement but then caveat emptor! so what to do?sigh......

adego said...

there is no single wrong doers in the food chain of structured products.

The greed is the driving force of the whole product cycle.

started with greedy shareholders who wants the ceo to do a 'good' job, and ceo will drive the product manufacturers, and the manufacturers will capitalise on the greedy consumers.

and the ceo sees it profitable, and further push for more product series.

this greedy cycle will go on well, until something disastrous occurs, and call it a day - good bye structured products.

Anonymous said...


Are you investor or concerned citizen.

And the way you and Richard Woo are going why don't you set up yr blogs so that TKL can link to you.

Give others a chance to rant too RW.

Anonymous said...

Some of the older folks who bought these products hv been jobless or doing odd jobs for many years.

One of the reasons why they bought into such products is that they need to put money in safe products to earn some interest to supplement their incomes.

So they are actually very vulnerable, even though they may hv some "papers" or may hv received some education!!!
Is it fair not to compensate them bec they are not lowly educated???

Anonymous said...

Thank you R Williams, for putting these together. It is so well written and so true, and I am sure it will go into the hearts of many people, especially the troubled investors.

ym said...

RW, just to clarify, investors were SELLING insurance via the CDS embedded in the CLN... not buying...

the ppl to blame for low int-rates and high consumer prices is ultimately the central banks...

becoz they love their favourite hobby ie money pumping (keeping interest rates and forex rates artificially low)..

in the long-term wat this results in :
- divertion of wealth from the poor and middle class to the rich bankers and business-man..
- mad rush for higher yields and bubble activities..
- real economic destruction...

i spoke abt the casinos, property, lux watches, contemporary art bubbles a few times in Mr Tan's blog... but few ppl see the economic destruction of these bubble activities, prefering to have misguided faith in government intervention and bailouts..

all these government bailouts and intervention will bring abt another great depression...

Anonymous said...

Caveat emptor does not apply if one can prove misrepresentation and/or fraud. Folks need not rely solely on the SFA and the FAA. There is a catch-all statute against fraud in the Penal Code (see section 420 - cheating). Why hasn't the AGC act?

Anonymous said...

Don't understand why a person who seems to have known so well the structured product could have this kind of philosophy centred on GREED.

adego means: White=Black or Black=White?

Anonymous said...

It ain't fair.

But since when is anything in this world fair?

Any fairness is random.

Stop moaning RW. Why does yr Mrs put up with all this moaning? Or you only bore others, not her? ))))

Anonymous said...

A top rate exposition, R Williams. With articles like yours coming onstream, the scale will tip eventually against those who sold these "poisonous" products to consumers.

The funny thing is that the governing authority - MAS in this case - seems reluctant to point the finger directly at the wrongdoers. And who are the wrongdoers, one might ask? Your article has a lot to tell them. However, is there something else they know which we don't?

But the case seems clear to me, the distributors were grossly wrong for selling these poisonous products to the public. That was primarily wrong from the word "go".

Anonymous said...

The root cause of this saga is MAS !! They were the ones who approved and let loose these TIME BOMB products into the retail market. They get million dollar salaries but did not do due diligence to justify their obscene pay !!!

MAS - what have you got to say ? Remember God is watching !

Anonymous said...

RW, I agreed that it is not fair but the world is never fair so what to do. Sigh....

Anonymous said...

Casino will spin off another slew of financial products. Wonder do they come MAS regulation ?

Anonymous said...

RW, well written. This is a fraud right from the start but has slipped through the nose of MAS. Why? Only those in power will know, it's top secret (not meant for us). FI will happily sell since they were approved, who would reject a business opportunity like that. Then when they poliferated to the commoners, all they said is buyers beware, greed, let's move on??? What kind of country are we living in? Unique dimension we're in right...let the next election tell your wish then, may be XP or XXP should change their slogan to "Change:We Need - Now It's the Time!".

Anonymous said...

Robin said,

I read somewheremany years ago quote and unquote "that Banks are legalised loan sharks" and this remarks refrained me from ever savings or depositing my hard earned money in Banks. I invested in cashflow products and keep it that way as we must respect the Banks for creating jobs I do not want to get entangled or mis judge and kept minding my own business! Each time I ever cash in my checque, a Relationship Mgr. will somehow smell sugar or honey and tempt me with the usual UNIT TRUST and other Bank related investments that I cheekily tell then "IN GOD I TRUST"........politely!!!
Due Diligence vs Sweet Talking RM

Anonymous said...

If what u described is true, it is not right.
Hope the god is watching. Hope the sky is watching.

Anonymous said...

You are right, completely, its not fair and its not right, but only 10,000 people lost some money, maybe the rest of the 4 million people invested right and made money and contributed to the country's GDP. Don't feel bad, even Temasek and GIC make mistakes, but they are not whining right. Lets see, ABC learning, $600 million, Washington Mutual? Citibank $5 Billion? Merrill Lynch $5 billion? Astraland? ....and others?

Anonymous said...

"Did you realize that you were not told of the REAL ODDS, unlike in a REAL CASINO ?"

Life IS a real Casino.

Every step of the way from Birth til Death.

Your parents gambled if you would be born fine when they found out they are pregnant. You gambled if crossing the street at a green light is LESS riskier than a red one. You gambled if your course of study would offer you a stable income stream in your intended industry. You gambled if you would go for the risky surgery or let the cancer eat you alive.

So do you want claim compensation from someone, anyone for your loss of your umbilical cord? your baby milk teeth? your mind to Alzheimer? or your inability to control your bladder?

So just what is Your inability to control your assets? WHAT IS IT?!

Enough said.

Anonymous said...

RW, since no man is created equal, why do you think this world is fair? Accept that world is unfair and work around it.

There is always fixed deposits, CPF-OA and CPF-SA, how come people don't put money in time-tested products but instead go and be so adventurous?

When things go beyond normal, like locking in money for 5 years to get 5% instead of 2%, commonsense tells me it contain higher risk. I was reminded of the old saying: A fool and his money are soon parted.

Just be conservative and leave your money in normal savings account and fixed deposit, you will be ok.

Anonymous said...

a tan and other wolves in sheep clothing,

1) if you are forced by your employers to scan blogs to disparage others, we feel for you. We do hope you can move to a better job soon.

2) if you feel guilty-conscious after destroying people's lives, give a little thought to their sufferings. We can still forgive you.

3 if you just like to make fun of people in times of trouble, we do not know what to say.

Have a great day.

Anonymous said...

How could we send this article to MAS? Have they understood what happened until now?

Chew Boon Keng said...

If you read MM's comment in the Straits Times today, you will understand why MAS is dragging its feet and not doing anything for the investors. MM is of the opinion that the investors should know the risks as the 5% interest they get was many times the rate for fixed deposit. In other words, you should have known better!

I now await to see what action would be taken against the Town Councils (and maybe Stat Boards) who have invested in these products and lose public money in the process.

Are they suppose to use public funds for risky investments? A public inquiry would be in order.

Chew Boon Keng

Anonymous said...

Action taken against the Town Councils?
A public inquiry would be in order?

Dream on.
The MPs have already says they are peanuts. Luckily got capped. Walk in with eyes wide opened. Cannot affect DBS share prices. Case by case closed.

adego said...

the society will progress well if we can accept that,

'all animals are equal, but some are more equal than others.'

the world has been in this state, and getting worse, if u are talking about 'fairness'

to all the anoynimus who like to be identified as 'anoynimus' and attack others, why don't u show up a consistent id? nobody bothers to talk to anoynimalities.

Anonymous said...

MM had been wrong on a number of occasions lately. He felt not long ago that Obama would not win or a wise choice, he felt not long ago too that Asia will be decoupled from US economy, Minibond may be another he is proven wrong.

Anonymous said...

Below are some of my personal observations.

1. The MAS is obviously not doing enough. Maybe the best option available now is a CLASS ACTION lawsuit against the Damned Bloody Slow to settle Bank. This would be an excellent track record for the banking services sector. It would teach future generations to be extra cautious. They would never again be tricked by these branded global and home-grown prestigious companies. A lesson I have learned over the years of watching big businesses engulfed in malpractice.

2. Print reporters are writing only one side of the story in order to lobby public opinion in favor of the establishments. This is indeed a sad time for me as a citizen of Singapore.


Anonymous said...

u think u're guru, but u behave like a man in the street.

LB, ML & MS go hard on CDS so does DBS.
Are they wrong? NO. Why? U know what is CDS for and if it goes hard on sophisticated investors, YES, I rest my case. So it is SUITABILITY the theme not GREED. Regulator failed to check! Designers bet even bigger! FIs happily take things for granted! So it ends up with disasters. Please do not think it is a small fire, U, guru, right, think that if it can burn down the entire pasture!

Anonymous said...

Just wondering.. , imagine the scenario - we enter a casino to have a look. We are attracted by the lights and sound, and seeing other people winning on the jackpot machines, we decided to have a go. After a few hours, we realised that we have lost a considerable amount of money. Do we protest to the casino that we do not know how the game works, that we do not know that the odds are against us, that over the long run we will almost certainly lose. If the reverse happen, we spend some hours and happen to strike the jackpot, do we still complain?

Actually, almost none of the vistors/players at the casino knows the odds. The games are designed to attract and appear simple, but the odds are always against the players. We can only reduce the odds by playing over a few days and having a huge amount of capital.

On the issue of disclaimers stated in the minibond prospectus. We all know that disclaimers are not easy to read. They were written by lawyers. However, we are faced with disclaimers almost everyday, disclaimers that come with the housing loan documents, credit card application forms, atm card application forms, even signing on a new blogger/email account, buying a handphone etc. Do we read everything? All these documents/contracts come with pages and pages of conditions/rules etc. Normally, we just sign and forget.

But we must remember that if the contract is really important, we should read it very carefully. We should be given more time to read and some grace period to reject the contract if we subsequently feel unsure of our obligations.

In the case of the minibonds, the unfortunate and almost unbelieveable thing happened. The credit event happened. Now faced with the huge loss, everybody is saying why is the product there, why is it being sold?

If we believe that by giving us 5% return p.a. is to lock us for 5 years, then to lock us 100 years, they will have to double our investments every year.


Anonymous said...

when a child misbehaves, who do you blame? the child or his parents?

please bear in mind that financial institutions do not know what they themselves are selling. lehman, morgan stanley, merrill lynch has purposely packaged the products in such a way to mislead the public so they should be sued. the US govt should also be responsible as the shit arose from their side.

however i believe that MAS should not be spared as they are the regulatory authority. if what they approved is not safe, what else is?

Anonymous said...

The irony of it all. Some dickhead can come in and paint casino and bank in the same light.

The folks did not wander into Marina Bay Sands Casino.

Anonymous said...

To Anonymous 4:25PM

You are absolutely right.

I was wondering why the RW article is painting bank and casino in the same light and in the same sentence. I also wonder why? Because like that readers start linking to casino and go different directions.

I am not sure if people can wander into casino but most folks don't wander into banks. people wander into shopping centres yes, but banks, no. coz nobody likes to queue. people go to bank for a purpose: put money, take money or do something with money.

But give him a chance, I don't think he is a "dickhead", he is like a boy asking father: I study so hard also cannot go into the school of my choice, that boy, his father is so and so, his results worse than me, can get in, is this fair?

Anonymous said...

Fascinating that even Town councils can be hoodwinked to buy these products, but the money is not theirs to lose - it is the HDB owners.

Makes me wonder if CPF is going to be the next toxic product. You want 4% in ord accounts, you go in with eyes open and there is no free lunch, so our kind MM reminds us.

What nasty products have people in GIC invested in? How much have they lost.

Do we know? CPF - a toxic product?

Anonymous said...

If MAS , MM Lee and PM Lee refuses to check because they are PAP people, I guess the next level is the opposition in parliament and NMP.

I find the silence of President glaring. Would he be a people's president like Ong Teng Cheong?

Anonymous said...

if the MPs who decided to buy the minibond for the sake of enhancing the returns of the town council funds, he must be very convinced it is a very safe investment for a mere 5% returns. If so, did they also invested in it with their own money ?? If not, they are simply taking risk with our money.

buyers of minibond have been cheated as the product is sold as a safe investment but turn out to be risky. Ask anyone - tom dick or harry, if the seller told him that the investment is risky with returns of 5% will he buy ?? Common sense !
And the government can say buyers buy with their eyes open ?? How un-reasonable & unsupportive the government here is. Absolutely disapponted.

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