SCMP: Clear up the mess

18 July 2009

The incessant dispute over compensation for Lehman Brothers minibond victims could seriously tarnish Hong Kong's image as an international financial centre. And without proper closure, protests by victims will continue to be a common sight outside banks in Central. Nearly a year after Lehman collapsed, leaving behind HK$30 billion in now virtually worthless minibonds, some 40,000 local customers are still awaiting a resolution and proper compensation.

After the crisis exploded, all the political parties immediately swung into action to help victims, a special Legislative Council subcommittee was set up to investigate the debacle, and the government also moved quickly last October to push banks to devise suitable buy-back packages.

Despite the slow progress, we are beginning to see some breakthroughs in negotiations. There have been reports that 16 banks are offering to settle with minibond investors for about 60 to 70 per cent of their principal investment. This is similar to the Bank of China (Hong Kong)'s proposed settlement.

But, Peter Chan Kwong-yue, chairman of the Alliance of Lehman Brothers Victims, said the offer is unacceptable because the underlying assets are worth more than 60 per cent. Investors want to be fully compensated for their principal investments.

About 48,000 Hongkongers lost billions of dollars when the value of minibonds credit-linked to Lehman Brothers plunged after the US investment bank collapsed last year. Critics question whether banks that offer to buy back the minibonds at only 60 or 70 per cent should still have full title to the collateral.

The market values of collateralised debt obligations (CDOs) are determined by numerous factors, and a slight economic rebound in recent months could have pushed up their values. But the question is: does the modest recovery truly reflect the beginning of a bull market? We would do well to remember that we might not have experienced the full impact of the financial crisis.

All things considered, it is doubtful whether the market values of CDOs could retain the 60-70 per cent level for a sustainable period. Market trends are incredibly erratic, thus the buy-back offer is realistic and reasonable. The tug of war over compensation should not be allowed to drag on indefinitely; the longer the process drags on, the fewer benefits investors will receive.

It is understandable that investors want to hold out, hoping for a better deal. But it's baffling to see why the Securities and Futures Commission has been involved in negotiations. It has flatly rejected the offer on behalf of investors and asked banks to pay a higher value of the principal investment.

The minibond crisis has exposed a myriad of problems in the financial regulatory system - loopholes in the law, gaps in the regulatory system, inadequate investor protection and a lack of crisis management in the event of the failure of a large firm. And the SFC must shoulder a fair share of blame.

Frustrated at the lack of compensation, many minibond investors have criticised the lengthy negotiations with the sellers and the lack of clear guidelines from the regulators about handling their complaints. They are also confused as to where they should take their case - the Monetary Authority, which regulates banks, or the SFC, which regulates the securities market.

Still, we cannot ignore the fact that the SFC has failed to police banks and brokers that sold toxic investment products to ill-informed investors. It has been grossly negligent in performing due diligence in regulating Hong Kong's increasingly complex financial markets. And now it has put on a futile political show by assuming the role of saviour, which will benefit no one at best, and damage its reputation and that of the government at worst.

Our regulatory system has failed to evolve with the times, despite the emergence of increasingly obscure and complex financial products.

The ever-increasing amount of cross-sector selling has intensified calls for reform. But the key question is: do we have the will and the wit to move forward?