Tan Kin Lian's Blog: Issuers of toxic notes should take more of the blame

Sunday, November 23, 2008

Issuers of toxic notes should take more of the blame

Dear Mr Tan

I have been tracking news of Minbonds, Pinnacles and Jubilee Notes (MPJ) series actively. Some points I have observed and wished to highlight

1. Distributors with advisory roles distributing the MPJ series have recieved alot of flak for their sale, esp DBS Bank. I am not sure how much revenue these distributors are paid for each $1000 invested but a educated guess would be not more than 5-10%, Its pretty amazing how so much flak is diverted on them as opposed to the issuer (manufacturer) of these products. Lehman is insolvent now, yet, Morgan Stanley (Pinnacle issuer) and Merrill Lynch (Jubilee) have offices in Singapore and they have recieved less attention as opposed to DBS bank. As issuers of the notes, margains are definitely higher than distributors like DBS, yet I see Morgan Stanley/ Merrill Lynch relatively unscathed by all these. Surely there are no protests and investor wanting justice. I am not sure if some of the investors are even aware that Merrill Lynch/ Morgan Stanley are the issuers for them and not the local banks.

2. The main issue here are the bankrupty of the underlying asserts that causes the credit events leading to the default of the notes, I have gone through the prospectus and none of the underlying assert was mentioned. In fact alot of, esp less savvy investors, believed that the funds are invested in the 6/7 major reputable and not the underlying 150 firms. Since the underlying sercurities were not in the prospectus except that at point of printing all are rated double AA rating. If the distributors are not informed of this, is it fair to blame them wholly ?Further with a margain spread of 10-15%, does investor really expect the banks to pay them 100% of their investments? Can the banks then blame MAS as these MPJ investments were approved by MAS for sale.

3. My point here is to let lay the blame on the right parties who are primarily responsible for all these. Local Banks/distributors may have some smaller responsibilities but Morgan stanley and Merril lynch should rightly be held responsible for all misleading marketing info (since all marketing brochures pertaining to the product is issued by these 2 investment banks). Charges of continous issuance of series for pinnacle series continued despite the dismal performance of series 1/2 , yet the series were allowed to launch till series 15...

I hope you can post my comments as despite all the emtions about investments, I think we should be going after the parties who are PRIMARILY responsible for all these saga then the local distributors. In some ways, they may be victims as well since I believe noen of them knows abt the details of the investments as well.

DRAW

32 comments:

Anonymous said...: Investors themselves have to shoulder something.

Its not possible how each of them suddenly turn saint.; November 23, 2008 10:46 PM
Anonymous said...: Pls watch the video to see what role did the credit rating agencies play in the current economic crisis,
it's sort of fraud from the very beginning due created to generate more $$ for them.

http://www.pbs.org/now/shows/446/index.html; November 23, 2008 11:05 PM
Anonymous said...: In the first place, when I see names of these US investment banks in anything I need to put my money, I straightaway reject it. They are not meant for ordinary retail folks!
Yes, they have branches in Singapore but they are not even allowed by law to collect deposits.; November 23, 2008 11:28 PM
Anonymous said...: Draw: Assuming someone use a long sharp knife killed another person. Let say you are the victim's relative or policeman, you should go after the murderer or the knife manufacturer?

Zhong; November 23, 2008 11:56 PM
pisces said...: Did anyone read through the Class Action on UBS for Lehman Principal Protected Notes ?

The Class action is against UBS (as a seller) and the ex-CEO of Lehman and a few Lehman Directors who were responsible on the original (2006) Prospectus.

I am from Hong Kong. Not familiar with Singapore's case. It's possible that you'll find similar flaw in the prospectus by Morgan Stanley or Merry Lynch. In that case, you should be able to sue the distributor banks and the issue of the prospectus. it's good that the 2 companies are still running ;-)

class action filing:
http://www.girardgibbs.com/PPN%20Complaint.pdf

It might be worth reading through the filing on UBS and the former Lehman directors.

My 2 cents.; November 24, 2008 12:15 AM
Concerned said...: Agreed that we should go after the issuer and arranger, i.e. Morgan Stanley for Pinnacles Notes, Merrill Lynch for Jubliee Notes and DBS for DBS High notes 2 & 5.
But FIs also have a role to play here, as without the FIs, very few investors would have bought into Minibonds, Pinnacles Notes and Jubilee Notes, etc. If these notes are offered directly to the people by these investment banks, very few retail investors would have bought them. The question here is why did'nt the FI check the product suitability, the risk, returns, etc before roling out those products. Don't these FIs have in-house investment experts and lawyers to go through the prospectus and check with the investment bankers before rolling out the products.; November 24, 2008 12:26 AM
Anonymous said...: DRAW,

You raised good points regarding where responsibility lies. However, one distinction you didn't make is which parties along that chain of participants are best and least able to make the invesmtent decisions on complicated products and which are the most complicit in misrepresenting risks.

Sure, Morgan Stanley, Merrill, Lehman, etc. are the ultimate source for a lot of the risky investments. But my understanding is that they did not sell or place those minibonds directly with retail investors. Instead they dealt the products thru local financial institutions.

Those local financial insts are the ones that should be far better placed to understand the risks and limitations of those products before recommending them to retail investors, practically all of whom do not have the wherewithal - knowledgewise or resources - to truly understaind the complexities of those products.

Sure, the local FI's can claim they were misled by the foreign issuers. In which case why have they not staked any claims? Perhaps that would make the local FIs look highly incompetent. And the choice of admitting to being incompetent/unknowledgeable (because they didn't understand the risks of those foreign bonds before distributing them locally), or being ruthless/unethical (because they sold complex risky products to unknowing retail investors), is a tough one to make. But one or the other is what they have to admit and accept... likely the reality is that parts of both are true. There's no way local FIs can try to lay this off completely upstream or downstream when they were a critical participant in the entire chain.

The bottom line is the last person(s) on the chain - the retail investors - was the one that got saddled with horrible investment advice and completely inappropriate products (which btw, aren't even sold widely in the US, and where the US National Assoc of Securities Dealers have guidelines on recommending these to only the savviest investors, if at all). And the only party which is responsible for that is the one immediately up from them.

Bumblebee; November 24, 2008 12:40 AM
Anonymous said...: I gree! The responsibility for compensating the investors lies more heavily on the arranger rather than the disributers. They're the ones who engineered the products. Merrill Lynch & Morgan Stanley must be taken to tasks for the failed Jubilee 3 and Pinnacle S9 repectively. The onus is on MAS to take action against them since it's beyond the shadow of doubt that the products are not suitable for retail investors regardless of their literacy levels. The arms length approach taken by MAS and the stance of not over regulating are also reasons for such toxic products to be put on the market. It's therefore unreasonable to let affected investors to sought out their woes with the distributors individually. More so, MAS must stand in for all investors to fight for justice and not behave like a bystander.; November 24, 2008 12:41 AM
Anonymous said...: Those who were US trained financial 'workForce' link to these organisations , none had whistleBlowed before this crisis?

How dare you all to cheat your own country man. WHat you need to do is to go any Kopitiam and said ' MiniBond beh sai boay eeehh'. therumuour will go very far...

The entire behaviour is like... We cannot offence American.... Seem like CitiBank is going down the drain and We wondering ' any terms and conditions ' properly defined and read by our smart investor.; November 24, 2008 6:27 AM
Anonymous said...: I agree with the view of anonymous 12.41 AM. The investor has a contract with the local FI that distribute the product and the local FI is also responsible to provide the relevant risk advice in the interest of its clients. To ask the investors to go after the issuer is like asking those consumers who bought the contaminated products from China or other countries to go after the manufacturer in that country. However, all the local supermarkets, wholesaler and retailers are willing to accept the returned goods for cash refund. The local FIs distributing these toxic products should do the same.

As for anonymous 12.41 AM, MAS should be the authority to take action against such investment banks for bringing the products to Singapore. MAS should blacklist such FI from introducing such toxic products to Singapore.; November 24, 2008 7:22 AM
Anonymous said...: Where are the responsibilities of the Investors?!?

Why is everyone taking the Opportunity of blaming anyone except themselves

Or is it plain taking Advantage

On this alone, i can understand why the FIs are not intending on compensating

if i am them, I couldnt tell whose lying whos 'misled'; November 24, 2008 10:45 AM
Anonymous said...: 10:45 AM

Do not speculate.

FACT spelsl for itself. Many may argue a lot on LAW. But bear in mind that LAW is founded by FACT.

There are interviews conducted by the FIs to establish the FACT at the time of sale. Do trust them. The reports will be scrutinized by the committee set up comprising the FIs snr managers and the independent investigator appointed by the gahman.

Their ACTs will bind the gahman and it will be FAIR or else it will lose more for sure later if not now.; November 24, 2008 12:20 PM
Anonymous said...: To 10.45am,

You obviously don't understand the predicament of the investors. Use your heart and not your galls to reason. It must be your superficial understanding of the whole debacle causing you to utter such naive statements. If you know nuts about the situation, pls go get yourself educated on the credit link products and tell us how much you can comprehend?!?. This is a serious matter and not a blame game..get it! The root cause analysis requires professionals with intimate knowledege of the products. Let's not pass frivioluos statements and trivialize the whole matter! Why would Mr Tan sacrifice so mach if he feels that investors are to be blamed? Please have some respect and regards for his selfless drive to help investors knowing very well that the products are toxic and not fit to be sold to all retail investors!!; November 24, 2008 1:03 PM
Anonymous said...: I am in the position to say what the Blog Owner CANT say.

this is clear enough?; November 24, 2008 2:24 PM
Anonymous said...: Law is founded on evidence.

All evidence so far points to a mutual relationship between willing seller and willing buyer. The market just happens to turn sour thats all. These are the Facts.

Nothing shows or proves the contrary so far.

Whats there to argue.

UNLESS we have Defectors. (but pls dont pay them, not taxi, not even lunch); November 24, 2008 3:06 PM
Anonymous said...: Evidence is clearly on the card. Suitability is the key word and guess who said that? MAS deputy chairman. At where? Parliament House.

Law is founded on evidence. Where comes this evidence? FACT. It is why there is a FACT FINDING by the FI to retail investors' complaint. Do not assume that it is a 'Wayang show' and the opposite parties are more than happy to witness this 'Wayang show' one would pressume.

o Man already said the case is closed by LAW. The dotted line signed is conclusive why then put up a 'wayand show'? It is the FACT that cann't be covered up.

Refer to, "...All evidence so far points to a mutual relationship between willing seller and willing buyer. The market just happens to turn sour thats all. These are the Facts....."
What evidence? Are talking about buying shares and selling shares? We are in the Çredit-linked structure product sold as FD equivalent. It is the willing seller gives the marble in exchange for the willing buyer's diamond.
The market just happens to turn sour thats all? Market turns sour. All the investors will be severely affected, WHY credit-linked note holders complained? Becos it is not shares mah! If U are SPH, STE, City Dev shareholders, U won't lose all capital and U may adopt averaging down strategy and in 5 years, U probably will make. CLNs, died many times already.
I remember U are the guy said that after reading the 1st page of the prospetus, we know what risk you will be in. Yes, no body bothers to read the prospetus after the sale is closed, but in no way it cover up the fact that this product is misold.; November 24, 2008 5:53 PM
Anonymous said...: Thanks.

I am sure that sounded coherent.

Especially the part you admit you DIDNT read the prospectus.

Not even AFTER the sales was closed.

Now the FIs need just another 9,999 confessions and we can all move on now.; November 24, 2008 7:01 PM
Anonymous said...: Let's assume you bought a tainted milk product from a supermarket. Would you seek refund from the supermarket or the milk manufacturer?
Bottomeline: it's the supermarket responsibility to return the tainted product to the manufacturer and not the customer.; November 24, 2008 7:35 PM
Anonymous said...: "Anonymous Anonymous said...

Let's assume you bought a tainted milk product from a supermarket. Would you seek refund from the supermarket or the milk manufacturer?
Bottomeline: it's the supermarket responsibility to return the tainted product to the manufacturer and not the customer.

7:35 PM"

If the milk manufacturer has flipped belly and the supermarket continue to ignore me

Then all i get at the end of the day is to sit on my toilet bowl and sulk

thats just about it really.; November 24, 2008 8:37 PM
adego said...: the issuer should take more blame, what about the regulator? the regulator should take some blame

what about the gahment who grant authority to the regulator?

yes, gahment should take the blame.

who choose the gahment? the pple, does that mean pple should take some blame? no

why not? becos not all pple choose the gahment

blame those who choose the gahment

blame the parents of these pple, becos they gave birth to these voters

we can further track down to past few generations, to China, Malaysia, Indonesia, India, Sri Lanka, Pakistan, UK, USA, etc. the old immigrants and new immigrants..
These immigrants has to take some blame... the gahment of these immigrants also has to take some blame, becos they let them leak out and flow to Singapore.

...finally, Adam and Eve will take all the blames.

let me tell u something, we should not blame the investors, they are goondu, idiots, not financially literate, not street smart, naive, easily deceived, always think of free lunch. BUT they are not to be blame.; November 24, 2008 10:11 PM
Anonymous said...: Hi,

Did I say I didn't read the prospetus. No, I said that no body bothers to read the prospetus after the sale is closed becos the sale is closed on the ground of Misold, misrepresentation or the like. The Credit-link structured product now has become FD. Look at the fact find/RM recommendation, it merely asks U if U have knowledge of Unit trust and a tick is placed even for an uneducated man so defined who only have saving acc & FD acc. The FIs assume that they read & understand the prospetus instead of their highly qualified RMs under the FAA to give the RIGHT recommendation. The RIGHT thing is not done in the first place, so the FIs hope that the thing can be done RIGHT for them by pleading that the ordinary men are willing buyers. The FACT tells U that it is not RIGHT.
Again, I say the FACT is FACT not LAW. It is the point of FACT and not the point of LAW.

Just to add on, Not only I read the Prospetus and Pricing Statement but I pressed the FI & RM for the details of the synthetic CDOs which is said to be the trade secret of the issuer and I complained to FI and alert the note holders the likely failure of the notes even with some mathematical calculation.; November 24, 2008 11:28 PM
Anonymous said...: "no body bothers to read the prospetus after the sale is closed"

Thanks once again, on behalf of the FIs

We wish more Investors are like YOU; November 25, 2008 12:30 AM
Anonymous said...: "Just to add on, Not only I read the Prospetus and Pricing Statement but I pressed the FI & RM for the details of the synthetic CDOs which is said to be the trade secret of the issuer and I complained to FI and alert the note holders the likely failure of the notes even with some mathematical calculation."

I am sure everyone heard your alert somewhere.

everyone except the 10,000 claiming their refunds here.; November 25, 2008 12:48 AM
adego said...: u mean u read the prospectus...?
and u still invest into CLN?

u didn't get satisfactory answer, and u trusted rm?

that's a good 'trusting' virtue. We can't blame u. are u an investor or CLN? ok. we will not blame u.

ok. fact is fact and law is law, fine, blame rm, blame the bank, won't blame u. not to worry, won't blame u, I promise; November 25, 2008 12:49 AM
Anonymous said...: Hi,

Fact is Fact. Law is Law. Who to blame? I thot the discussion in TKL's blog over the 2 months are more than sufficient.

Refer to: "...u mean u read the prospectus...?
and u still invest into CLN?...." What is CLN? How the CLN works? It is the talk of the last two months. Prospectus, I thout U got the fact that the prospetus was given after the sale.

So much TALK, but no FACT. What U guys try to prove? U can play with words but not FACT. Thanks!

How do the structured products work and what is mis-selling? Ask the girl who U said got no brain. Read ST 26 Oct 08 invest pg 21 & 22.

We spell FACT not LAW.; November 25, 2008 9:47 AM
Anonymous said...: The FACTs are:
no body knew what was CLN at the time of sale.
rms are of disparity of quality.
Misrepresentation ranges from fradulent, reckeless & innocent.
MAS failed to regulate the unregulated CLNs.
FIs misjudged the damaged effect of CLNs.
The UNSUITABLE retailed investors were sold the CLNs as FD.

Do not drag in the prospetus and willing buyers & willing seller relationship. The prospetus is another evidence of 'misold' - FD doesn't need a thick prospetus. There are willing buyers for FD but willing sellers for CLN and the contract is closed upon rm's 'mis-selling'.; November 25, 2008 10:18 AM
Anonymous said...: how can people not know what is CLN? just google and you can probably find out already. as i read through the whole chain of comments, i'm sincerely lost. pls try to present your arguments in a clear way and avoid using emotional words on other people who disagree with your point of view. otherwise you are just giving a bad impression to others who are reading this blog to find out more about the matter.; November 25, 2008 3:02 PM
Anonymous said...: 3:02 PM
U are lost obviously!
If U google can get the FACT why U come to TKL blog? After reading so much U still catch no ball of the whole saga. Google can only tell u what is CLN, but does it tell u that CLN was sold to the victims as FD equivalent?

No body knew what was CLN at "the time of sale" and the CLN was sold to them as FD equivalent. Their RMs did not disclose to them that they were sold CLN as FD. Get it!

Read ST 26 Oct 08 invest pg 20, 21 & 22.

I am not here to challenge anyone. Though I disagree with 'them' on certain points I thank 'them' for intending to prove some of their points.

Of all the CLNs, only DBS HN5, ML Jubilee 3 & Pinnacle CLN 9 & 10 are gone case, many others still survive: DBS HN2, DBS CLN 10, MS PS 1,2,3,5,6 & 7 and PRU 3 plus....
Unless otherwise there are occurence of credit event in FTD REs, Synthetic CDO REs and swap counterparty, they will continue to receive qtrly/half yearly interest and the capital at maturity.

It is that the men in the street were CHEATED so they fight for justice. Get it! Do u think they shall keep quiet and just move on?; November 25, 2008 4:24 PM
Anonymous said...: The FACT is the "FACT FINDING" done by FIs were indeed WAYANG SHOW as many investors will tell you the inconsistencies, inaccuracies and incomplete information recorded by the RM in that document.

To many uncles and aunties who do not read and understand English, it was shocking to learn now what was stated or selected as answers were NOT based on FACT; especially those who do not have children or relatives who are able to help them read the document.

The investors placed LOTS of trust on the FIs and the regulator!; November 25, 2008 6:41 PM
Anonymous said...: The FACT is the "FACT FINDING" done by FIs were indeed WAYANG SHOW as many investors will tell you the inconsistencies, inaccuracies and incomplete information recorded by the RM in that document.

YES, the "FACT FINDING" indeed is one of the key issues and plays an importance role in the interview aided by a series of questionaires. It can no longer be another WAYANG SHOW as an independent investigator will be involved. The interviewers are not from the wealth management so to an extent an impartiality is in place.

Tell the TRUTH, the inconsistencies, inaccuracies and incomplete information recorded by the RM in that document will serve you RIGHT and require the FI which fail to do the RIGHT thing to do the thing RIGHT.

FACT is FACT not LAW. If the FACT is lost, there goes the LAW, the JUSTICE & the LEGISLATIVE SYSTEM.

Guys, tell the TRUTH, tell the FACT during your interview.; November 25, 2008 8:40 PM
Anonymous said...: You see, the aunties and uncles were so clever they didn't want advice and they walked into the banks with not only 2 eyes open big but also thick glasses . With 4 eyes how could they miss it?
Also old aunties and uncles when they bought revosave from ntyuc agents they also bought with eyes open big big and they also don't know how to ask advice and the agents will fill the fact finding form for them after closing the deal because the aunties and uncles trust them.
An uncle told me when he wanted to invest $100K in the Growth Policy the ntuc agent told him Growth no good but revosave good because every year he can recieve 5% interest .The agent told him to put $10K a year for 15 years and but he got only $100K. Agent told him to reinvest the interest and this way he is able to come out less to pay for 15 years. Then another agent found out about this and told him he was cheated and to report to police. i don't know whether he reported.
so the insurance agents also do like the Rms. they all same same cheaters of old people; November 25, 2008 8:40 PM
Anonymous said...: I think what is happening is that local FI is trying to stall, buy time to wear out victims. But if one group of victims sue and win the case, I bet local FI will also sue the issuers. The floodgate will then be open

Local FI is not taking that step yet because they still want to do business with American FIs and garmen tend to side angmoh bank more, due to their ambition to promote the country as financial hub; November 26, 2008 8:24 PM

Sunday, November 23, 2008

Issuers of toxic notes should take more of the blame

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