Friday, November 14, 2008

Structured products linked to Lehman Brothers

Contributed by Richard Woo

Let us recap the salient points and the parties involved, and issues/questions of relevance that appear vague and for which we need clarification and further information:

[1] Monetary Authority of Singapore [MAS]
MAS is the party at the top of the rung and it was MAS which gave approval, wittingly or unwittingly, for the sale of these toxic products to the public. And since MAS gave approval for their sale, MAS cannot now accuse the distributors for selling them.


The Prime Minister in an interview he gave to journalists on Oct 26 is reported to have said, inter alia, .. "In this case the Lehman Minibond Notes or DBS High Notes or ML Jubilee Notes were clearly not low-risk products." …

If they were not low-risk products, can they be considered as high-risk products, then, or, more appropriately, products with risks of robbing the investor of his capital, risks that were evidently sky-high and inappropriate, and absolutely incompatible with a meager return of a paltry 5% pa coupled with freezing of principal over a long period of five to six years?

MAS, it seems, can only point the finger at any distributor that has "mis-sold" or committed a legal breach. However, ten thousand investors have lost in total about half a billion dollars – and that's a lot of money; some of this money came from their retirement kitty, and for some it was their life-long savings.

In at least one product, there is clear evidence of mis-selling or making misrepresentations of the risks. If a distributor has misrepresented or lied to the investors, then there can be no justice in saying that investors did not enter with their eyes open; it would be an act of prejudice to blame investors by saying they should have invested with their eyes open; caveat emptor can in no way be introduced as a principle of fair play if one party has lied or misrepresented.

It is indeed strange that MAS has had no qualms telling investors poisoned by these toxic products: You were greedy. MAS is still investigating and exploring and that's laudable, but the comment about investors being greedy has no basis in fact and must be openly refuted or repeatedly refuted if necessary. If concerned MAS officials have a conscience, they would do well to examine it.

[2] "Vulnerable" group of investors – question for MAS/distributors
Would MAS or distributors please define the terms "vulnerable" and "non-vulnerable" and provide details of the criteria for distinguishing vulnerable from non-vulnerable?

Questions for MAS:
[a] Is it fair to leave it to each distributor to make the initial decision to compensate or not to compensate?
[b] Would it be fairer to consider, based on availability of evidence including but not limited to, advertising materials, internal procedures, risk-profiling of individual investors, as to whether any distributor was clearly guilty of mis-selling, or misrepresenting the risks involved?
[c] Would it be rational to think that distributors would admit liability to an investor who in their opinion is not among the group classified as "vulnerable"?

[d] Would it be unreasonable to say that if a distributor had mis-sold to Ms A or B it had in all probability also mis-sold to Mr X or Y?
[e] Would it be fairer to hold any distributor fully accountable to all their investors if they have mis-sold or misrepresented?

[3] Risk-profiling or analysis

Questions for distributors:
[a] What was the point of performing a risk-analysis?
[b] Was the risk-analysis performed in an objective manner?
[c] Would you agree that the risk-analysis was never used to determine whether an investor was suitable for the product concerned?
[d] Would you agree that you were selling a highly toxic product?
[e] Would you agree that any claim that you were merely acting as "order-executioner" cannot be meaningfully supported if you were uttering lies with abandon relative to the product, via print advert or otherwise?

[4] RMs
Can any of the RMs selling these structured products be said to be non-bilingual? To find out we need to see their CVs or ask their friends or family members. To be sure, many people in Singapore, especially the younger set, are bi-lingual.


Can it be rational to argue that an investor conversing in Mandarin, or in a vernacular other than English, with the RM is "vulnerable" but another investor discussing in English is not? But the crucial thing is: Did the RMs explain the risks of the product they were selling to the investor? Did they perform the risk-analysis diligently? Did they ask the questions concerning the risk-profile of the investor upfront, at the commencement of the discussion? Did they point out the risks spelt out in the so-called Pricing Statement?

Was a copy of the Pricing Statement handed out to the investor? Some investors have no hesitation making the claim they were not given a copy and that they did not even know what it was all about. According to some investors I spoke to, the RMs who attended to them spoke mainly about the merits of the product, for example, the interest yield, the quarterly interest payment, the link to highly rated financial institutions, the names of these institutions, and misrepresented by saying the investor would get all his/her money back if the investment were to be held to maturity.

Some investors have reviewed the risk-analysis form completed, in a hasty and careless manner, by their RM and noticed that although they were categorized as a low to mid-range risk investor, the RM did not tell them that the product was not suitable for them. I can see from the "tick-marks" completed for two investors that the information given in some areas was inconsistent or contradictory.

How many of the RMs, if any, really understood the contents of the Pricing Statement? It is obvious that people like MM are looking only at a small area of the picture. A complete analysis needs to take into account all the factors involved. Has any distributor or their RMs contravened a legal enactment, for example, the Financial Advisers Act? Any investigator seeking truth cannot avoid looking into this area. In the context of the scenario before us, would MM or MAS consider the use of the term "minibonds" as something innocuous, coincidental, or as something more than that, as part of a carefully hatched-up scheme, a scam perhaps, to fleece members of the public?

[5] Questions for Fidrec:
[a] What are your standards or criteria for making judgment on cases referred to you?
[b] The number of Fidrec staff involved in reviewing each case?

[6] Plausible entry of new swap counterparty to replace Lehman Brothers [Minibonds].
Distributors who have advertised "invest on solid foundations" and/or "invest with peace of mind" ought to take over as the new owner of the investment, with or without the new swap counterparty arrangement. Since they have misrepresented, through print advert and, plausibly, via verbal input from their RMs, they can be seen as having mis-sold or misrepresented, hence they should not shirk from their mistakes or responsibility; they should act honorably by returning investors their principal minus what the investors have received in terms of interest payment.

[7] Statistics – Request to MAS:
For the benefit of the investing public, please publish in the newspapers statistics covering data [in table form] linking information as follows:

Type or name of structured product, Name of Distributor, Total amount invested, Total number of investors, Number of "vulnerable" investors, Number of vulnerable investors if any who have been compensated and Number of "non-vulnerable" investors if any who have been compensated

[8] Future/present
It's all very well to think about the future by talking about revamping the industry, introducing tighter control measures, overhauling sales tactics etc but there is no future when the present is not taken care of. We all need to be mindful of the present; we need to be aware of the dire situation in front of us: an "explosion" has occurred and injured people are lying everywhere. Let's take care of all the injured before planning our next move.

Richard Woo

21 comments:

Tiang said...

If investors of Minibonds went in with their "eyes open", why is there a necessity to change the way the product was sold? It is an admission of their shortcomings.

There is none so deaf as he who will not hear. The verdict has been pronounced but the distributors need investors to cooperate by attending the interviews to legitimize the whole process. I, for one will not give them that satisfaction.

Anonymous said...

Before - Mr MxS always advocate tranparency & preach honesty & integrity .

Showtime NOW but Mr MxS cite cannot disclose this cannot disclose that ...

---------------------------
ANIMAL FARM by George Owell

The Seven Commandments, Animal Farm's original Constitution
Whatever goes on two legs is an enemy.
Whatever goes on four legs, or has wings, is a friend.
No animal shall wear clothes.
No animal shall sleep in a bed.
No animal shall drink alcohol.
No animal shall kill any other animal.
All animals are equal.

The Seven Commandments, after the pigs' "revisions"
"Four legs good, two legs better!"
No animal shall sleep in a bed with sheets.
No animal shall drink alcohol to excess.
No animal shall kill any other animal without cause.
All animals are equal, but some animals are more equal than others.

sigh ...
when the top is not straight , the BELOW WILL BE CROOKED .

IS THIS WHAT WE WANT TO IMPART TO OUR FUTURE GENERATION ?

Mr MxS - be brave , recall US President George Washington's little boy story ? DO THE RIGHT THING .

Anonymous said...

Thats way too much questions for NO REFUND.

adego said...

if there is no CLN, we don't have so much problem

if there is no financial engineers, we won't have CLN

if the university did not start the school of finance with dept of structured finance, we won't have so many investment bankers today

if...
if u guys don't have so much money, u don't have much to loose

if u guys know how to spend yr money well, u don't have so much money to be conned

if... there is no CLN crisis, this blog won't hit 700,000 so soon

VS Lingam said...

Pls refer to Richard Woo's comment at the top of this thread, para [1].

Pls note that MAS does not APPROVE products for sale in sg, though I personally feel they should. MAS only REGISTERS products for sale. There is whale of a difference here. It appears that there is no govt organisation that APPROVES financial products, like how AVA approves food and drug products. If MAS is worth its salt, it should take on this added duty henceforth.

MAS is now conveniently using this loophole to absolve responsibility, pushing it down to FIs to resolve the matter.

VSL

VS Lingam said...

This is the carnage of the global financial crisis so far. Keep in mind that these companies are not exactly emerging small companies but rather blue chips.
These losses include:

• A I G -Then: $178.8 billion... Now: $5.46 billion. Down 96.95%
• Bank of America -Then: $236.5 billion... Now: $123.4 billion. Down: 47.82%
• Citigroup -Then: $236.7 billion... Now: $76.34 billion. Down 67.75%
• Merrill Lynch - Then: $63.9 billion... Now: $30.2 billion. Down 52.74%
• Fannie Mae - Then: $64.8 billion... Now: $0.45 billion. Down 99.3%
• Morgan Stanley - Then: $73.1 billion... Now: $41.1 billion. Down 43.78%
• Wachovia - Then: $98.3 billion... Now: $19.44 billion. Down 80.22%
• JP Morgan Chase - Then: $161 billion... Now: $130.2 billion. Down 19.13%
• Capital One Financial - Then: $29.9 billion... Now: $16.9 billion. Down 43.48%
• Washington Mutual - Then: $31.1 billion... Now: $3.64 billion. Down 88.3%
• Lehman Bros. - Then: $34.4 billion... Now: $0.80 billion. Down 97.6%
• Goldman Sachs - Then: 97.7 billion... Now: $40.6 billion. Down 58.7%
• Wells Fargo - Then: $124.1 billion... Now: $111.25 billion. Down 10.35%
• National City - Then: $16.4 billion... Now: $2.8 billion. Down 83%
• Fifth Third Bancorp - Then: $18.8 billion... Now: $7.9 billion. Down 57.6%
• American Express - Then: $74.8 billion... Now: $37.5 billion. Down 49.87%
• Freddie Mac - Then: $41.5 billion... Now: $0.16 billion. Down 58.7%
• Suntrust Banks - Then: $27 billion... Now: $16.07 billion. Down 58.7%
• BB&T - Then: $23.2 billion... Now: $18.4 billion. Down 20.69%
• Marshall & Ilsley - Then: $11.6 billion... Now: $4.48 billion. Down 61.3%
• Keycorp - Then: $13.2 billion... Now: $5.68 billion. Down 56.97%
• Legg Mason— Then: $11.4 billion...Now: $4.96 billion. Down 56.49%
• Comerica— Then: $8.3 billion...Now: $4.74 billion. Down 42.89%
• Countrywide Financial: Then: $11.1 billion...Now: $0.00 billion. Down 100%
• Bear Stearns— Then: $14.8 billion...Now: $ 0.00 billion. Down 100%

Together these 25 companies alone have lost investors a total of $992,690,000,000 over the last 12 months... or nearly 1 trillion dollars.

And they say USA is the Land of Opportunities.

VSL

Anonymous said...

Boycott US made products.
Only this will bring the message back to US that some1 must be prosecuted and please takenote...

You will get NOTHING back for your investment. Unless you walk with a tongkat, white hair, >70 years, and can no longer work. They compensate you on CARE...

What can you do? Banking ACTs protects the bankers.
Unless you all run on the banks, withdraw your money and place under your pillow, or you need no more for your business overdraft...

aiyaa, it is a real MESS

Anonymous said...

The Hong Kongers has once again put our goverment to shame...Only the Hong Kongers can help us get transparency & justice not our goverment. Remember this when the next election comes around...

Transparency vow in Legco Lehman probe

Friday, November 14, 2008

Legislators from across the political spectrum yesterday began work on how best to conduct the Lehman minibond probe amid concerns over whether they will get access to all the documents they need.
Raymond Ho Chung-tai, chairman of the 26-member subcommittee, which will conduct the probe, said the inquiry could take at least a year.

Legislative Council secretariat officer Philip Wong Yu-hong and Ho will discuss today when the first meeting will be held following the Legislative Council's unprecedented decision on Wednesday to use its (Powers and Privileges) Ordinance to investigate Hong Kong's financial system.

Responding to speculation that the meetings may be held behind closed doors to placate the banks, and Ho and Wong would be the only two to have access to all documents, Ho said it is a matter for the committee as a whole to decide.

"We will do our best to make sure the investigation is as transparent as possible because the public has the right to know, unless there are special circumstances such as whether disclosure would be prejudicial to institutions summoned to testify ... or the public interest would be harmed. Yet the decision will not be mine but the members," Ho said.

The final size of the subcommittee and the sequence in which witnesses will be called to testify, will also have to be decided during the first meeting, he said.

Pan-democrats have expressed a desire to question some former government officials, including ex-financial secretary Antony Leung Kam-chung, ex-secretary for commerce and economic development Frederick Ma Si-hang, and former financial secretary Henry Tang Ying-yen, who is now chief secretary.

The pan-democrats have also called for the meetings to be open but agreed that some should be held behind closed doors if sensitive issues are involved.

They also prefer to have access to all the classified documents because the chairman and vice chairman are regarded as members of the pro- establishment camp and have threatened to issue a "minority report" if their demands are not met. STAFF REPORTER

Anonymous said...

"Blogger VS Lingam said...

Pls refer to Richard Woo's comment at the top of this thread, para [1].

Pls note that MAS does not APPROVE products for sale in sg, though I personally feel they should. MAS only REGISTERS products for sale. There is whale of a difference here. It appears that there is no govt organisation that APPROVES financial products, like how AVA approves food and drug products. If MAS is worth its salt, it should take on this added duty henceforth.

MAS is now conveniently using this loophole to absolve responsibility, pushing it down to FIs to resolve the matter.

VSL

10:34 PM"



You are not being fair to Them either.

How could ANY ENTITY guarantee or approve for Another Entity.

Could YOUR PARENT do so for YOU?

Anonymous said...

Our newspapers here are quite hopeless & useless. They seem to purposely blank out news of this nature from Hong Kong. Why? Is it because they fear offending the banks who advertise in their newspapers or the government, or too much (wrong, "Kia See") self censorship? Where is the integrity, professionlism & journalistic ideals? How to respect journalists here? Please, with the Internet, if you don't report the news, we will just publish it ourselves & show you up for who you really are. Go do some soul searching. May be you should quit being a journalist if you cannot be true to the calling of your chosen profession.


HK to launch probe into banks in Lehman saga
(11-12 22:52)
Hong Kong lawmakers voted late on Wednesday to invoke special powers for a probe into alleged misconduct by banks who sold investors failed Lehman Brothers investments, as pressure built on such banks for compensation.

The city's legislature voted after a marathon half-day debate to invoke sweeping and rarely used powers to investigate 21 banks alleged to have misled investors over failed Lehman Brothers investments, which could force top bankers and officials to testify, and banks to disclose commercially sensitive information.

Around 40,000 Hong Kong investors ploughed nearly US$2.5 billion (HK$19.5 billion) into failed Lehman-linked structured products and mini-bonds, with many accusing the banks of duping them into buying what they thought were low-risk products.

REUTERS

Anonymous said...

To adego at 10:18PM

Are you trying to sound smart with your little poem ? Sorry to disappointed you, you sound very stupid instead of smart ! Cos you still don't understand the crux of the matter ie. mis-selling and mispresenation depsite so many articles on this blog. Go back to school and get your P.S.L.E before coming back to this blog !

Anonymous said...

LTA approves Dongfeng cars made in China for safety and pollution controls, before allowing them on local roads.

IDA approves wireless telecom products made in Taiwan for non-interference, before allowing them for local use.

Anonymous said...

Richard's 8th point is worth a note. Singapore WANTS to be the regional financial centre. However, this debacle has made people think twice about putting their money where the FIs tell them to invest. Whether you've been burnt by the Lehman Bros saga or not, would you still trust those banks and stock brokerages to invest in products they distribute?

Just like the Formula One where gains can sometimes be intangible, I'd seriously urge the Singapore Government to resolve this quickly. Make the right decision now and reinstate Singapore as the leading regional financial centre. Drag your feet and you'll find Singapore falling further behind Hong Kong.

And not to mention the backlash from the people during the next election. This is definitely something that I'm sure the opposition parties will be using if this issue is not resolved satisfactorily.

Anonymous said...

VS Lingam.
Bush said...nothing wrong that US export Toxic CDOs.
France President and German C. WTF.
British PM. We can work together.

This mini bonds things...come on fellows ...it is a con job with high level lucrutive kickback to suck the wealth from Asean 2 super financial Centre. We must put the best LAWYERs, the BEst thinkers and the best strategists...to counter acts. TO find out how this all started and how all were looped into this 'things' since 2002..2003..or 2004. Dig all the memos, the email, the communicate..

Now have you stop frequenting Starbucks, MacD, PizzaHut, ...drink cocacola..
But we can't stop Blogging...

Tiang said...

To anonymous, 10:34

"You are not being fair to Them either.

How could ANY ENTITY guarantee or approve for Another Entity.

Could YOUR PARENT do so for YOU?"

The advertisements are under the purview of the authority. If misleading, they have the power and the duty to tell the FIs to review. We are NOT saying that they have to guarantee the product. We are saying that they should have done their duty to ensure the brochure is not misleading.

The brochure highlighted one risk (that of the Reference Entities) but kept absolutely quiet about the greater risk, that of the underlying securities. Was that not intended to bait the investor? Was that not intended to deceive? If there is intention to deceive, then there is fraud. Should not there be an investigation to determine if there is fraud? Only then can there be closure for the investors.

Don't make us go through the interview, just to tell us we cannot be compensated because we are "non vulnerable." You are wasting both time and resources (yours and ours). Is that your idea of "efficient Singapore"?

Anonymous said...

Quote
"if...
if u guys don't have so much money, u don't have much to loose

if u guys know how to spend yr money well, u don't have so much money to be conned" Unquote

Hello, Do u know many older people who lost their jobs 3,4,5,6.... years ago still cannot find a proper jobs, and the costs/inflation keep increasing.
To survive, and was told such product very safe by so many parties, so hv to put some money to earn slightly higher returns.
Now that the interest is gone, the principal is also gone!
It is not that they hv so much to be con, or dont know how to spend money.
It is no choice! Their earnings not sufficient to meet the expenses. Understand??

Anonymous said...

Blogger Tiang said...

To anonymous, 10:34

"You are not being fair to Them either.

How could ANY ENTITY guarantee or approve for Another Entity.

Could YOUR PARENT do so for YOU?"

The advertisements are under the purview of the authority. If misleading, they have the power and the duty to tell the FIs to review. We are NOT saying that they have to guarantee the product. We are saying that they should have done their duty to ensure the brochure is not misleading.

The brochure highlighted one risk (that of the Reference Entities) but kept absolutely quiet about the greater risk, that of the underlying securities. Was that not intended to bait the investor? Was that not intended to deceive? If there is intention to deceive, then there is fraud. Should not there be an investigation to determine if there is fraud? Only then can there be closure for the investors.

Don't make us go through the interview, just to tell us we cannot be compensated because we are "non vulnerable." You are wasting both time and resources (yours and ours). Is that your idea of "efficient Singapore"?



Wow looks like you knows a lot and seems alert

then why didnt you raise those concerns BEFORE you sign over?

why do you keep insisting some authorities step in NOW to do the job which YOU didnt do when there was the time for it?

That sounds like a Child

Anonymous said...

Singaporean has lost Total of $665 million lost on Lehman Related products. This are 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.

Minibond
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...

10:34pm VS Lingam said:

"..Pls note that MAS does not APPROVE products for sale in sg, though I personally feel they should. MAS only REGISTERS products for sale..."

In order to register the financial product it must be able to meet the criteria set out by MAS.It means that the criteria stipulated by MAS is not good enough to protect the retail investors. Whilst in Malaysia these toxic high risk products are not allowed to be registered with Bank Negara (Monetary Authority of M'sia)because they have very stringent requirements to protect the consumers. So MAS is still responsible because it negligently allowed such high risk product to be registered without proper scrutiny!

Anonymous said...

The bank's sales representive have always emphasize the word "100% principal protection" or capital protected. But how safe is the their word? Did they also mention the risk of getting nothing back, say if the total return is -10% at the end of the 5.5 yrs?

Richard Woo said...

To Anonymous 9.02pm, I agree with you, absolutely.

Whether MAS "registered" or "approved" makes little or no difference. The fact is, they were caught napping and hence allowed toxic products to flood the market, resulting in consumers, 10,000 of them, getting poisoned.

MAS and at least one minister are doing all they can to shift the blame onto consumers.

Is that being rational? My answer is no.

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