Sunday, July 19, 2009

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?


Anonymous said...

"After the crisis exploded, all the political parties immediately swung into action to help victims, and the government also moved quickly last October to push banks to devise suitable buy-back packages."

SWIFT actions. better results.

Anonymous said...

HI, All,

Can we send our petition letter to the press to publish? To force MP Mr Lee give us an answer.

Anonymous said...

HKMA may refer 930 more Lehman cases

China Daily 18 Jul 09

HONG KONG: The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, said Friday it is conducting detailed investigations on 930 Lehman Brothers-related cases which could be referred to the Securities and Futures Commission (SFC) for further inquiry.

The HKMA has so far referred 482 Lehman Brothers-related cases involving 16 banks to the SFC for further action since October 17 last year, after the outbreak of the Lehman Brothers "mini-bond" saga.

The HKMA has received 21,490 complaints concerning Lehman Brothers-related products as of July 16 this year, of which 21,253 have gone through the preliminary assessment process. As a result of the assessment, the HKMA is currently investigating 6,229 cases and seeking further information on 12,371 cases.

A total of 1,723 complaints have been closed as there was not sufficient prima facie evidence found after the assessment process. However, an HKMA spokesman said: "The closure of these cases will not affect the top-down investigations being undertaken by the SFC at the bank level."

More than 40,000 investors in Hong Kong committed nearly $2.5 billion into the complicated structured minibonds offered by the US investment bank Lehman Brothers, which collapsed last September.

The failure left the minibonds virtually worthless now and investors are still seeking compensation.

Over 16,000 investors have filed complaints to the HKMA and some to the SFC.

The SFC, the securities watchdog, has recently completed probes into several banks involved in the minibond saga and notices of proposed disciplinary action (NPDA), have been delivered to the guilty banks.

An HKMA investigation found evidence that banks sold the minibonds to elderly, poorly educated and mentally ill people while many investors claim that the products were marketed to them as low risk.

(HK Edition 07/18/2009 page2)

Anonymous said...

Yes, an open petition to force his hand.
Provided the controlled ST will publish.

Anonymous said...

Look at the logic please:

i) I complain to MAS, they ask me to go FI and FIDReC.

ii) I complain to MP in GRC, they ask me to go MAS.

iii) We petition to MAS and even met MAS, they say they are investigating. Then after 7 mths, came out with a report that basically says MAS is not at fault.
Even if FI is at fault, investor must show proof.

I signed petition. Now I will forever be a independent voter or what PAP called floater. Good luck to the next election. I just paid a expensive fee to not to trust MAS anymore....

Anonymous said...

"It is understandable that investors want to hold out, hoping for a better deal."

hong kongers are a spoilt lot. We in singapore are happy to get just 20% of our money back. why is it so unfair?

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