Saturday, August 08, 2009

Off-loading the risky credit default swaps

I share this hypothesis. Does it look close to reality?

During the years prior to 2005, investment banks were making huge profits by issuing credit default swaps to guarantee the bonds issued by borrowers. They sold these swaps to other investors and made a good margin.

In the later years, as the economic situation becomes difficult and defaults on mortgages rises, the investment banks were saddled with swaps that they were not able to off-load to ther investors.

Some clever but dishonest banker conceived the idea of designing a structured product to hide these swaps and sell them to retail investors. They looked for countries that are wishes to be a financial hub and have a history of being pro-business and weak in consumer protection. Singapore and Hong Kong were selected.

This was the beginning of the crisis of the credit-linked notes.

Tan Kin Lian


15 comments:

Tan Kin Lian said...

If there was an intent to cheat by the creators of these structured products, it is the duty of the regulator to charge them for cheating and put them into jail. This is done often in America. The suspect will usually be willing to settle out of court and compensate the cheated parties, and pay a fine, without admission of liability.

But this requires the authority to take the lead. They have the power and resources. Indeed, it is their duty. They cannot sit by and do nothing.

Anonymous said...

yes they can

Anonymous said...

I agree strongly with you, Mr Tan. Unfortunately our authorities have failed their duty so far.

GL Gan

Anonymous said...

It appears to me that our regulator thinks of itself as only an ISO9000 auditor of sorts, they only worry about procedures and documentation and training stuffs; as we know it, the regulator final judgement, was merely to ban FIs from selling something nobody wants anyway, and more importantly, the reason for their doing so was that FIs didnt follow procedures associated with selling of the product. It was never an admission of guilt (as in, mis-selling or mis-representing) on anyone's part to my knowldedge.

When it comes to the details of what is the product the regulator does not want to get involved, does not admit its failings, and the regulator gets away scot free because the government support their stance. SO THE GOVERNMENT IS ULTIMATELY RESPONSIBLE, not the regulator. Worst still the two oppostion party duds in Parliament has no idea how to stage a big fight and challenge the reports and kick a scene. One might argue that there are only two of them. But all you need is one, someone with charisma, drive, intellect and sense of justice. On the other hand when election time come, they will use these as bullets to get their votes again, but i am disappointed in them too, they show lack of positive action in this matter. You can put 10 but if they are meek and mild and limited intellect, what is the point. We have a bad government, the incumbents AS WELL AS THE OPPOSITION.

I am not a victim of the bonds. But I feel sad that this issue is handled in a completely unprofessional manner. Why why why why why have my one and only Singapore degenerated into this deplorable situation.

Rex

Anonymous said...

Your numerous calls had unfortunately fallen onto deaf ears simply bcos they got the "mandate" of 66.6%.

Anonymous said...

You're bang on except for one thing: the banks didn't need to offload the trash they sold to investors - hedge funds and institutional investors would have happily vacuumed up the same trades. They just decided to take those trades and package them up so that yield-hungry retail punters could blow themselves up in structured credit just like the big-time hedgies and instos.

Otherwise, yeah, pretty much, especially the bit about lax consumer protection. Trash like Pinnacle Notes and minibonds would never have flown in any regulatory environment other than Singapore or HK.

Anonymous said...

Indeed in no other country in the world would a government sit back and allow the foreign investment banks to plunder its citizens. On this national day, those in power please reflect what you should do.

Beng Seng said...

Dear Mr. Tan

Your hypothesis is very insightful and true. MAS misses the point entirely when it chooses to focus on the mis-selling by local Fis and distributors.

The real issue here is fraud, and criminal actions (white collar crime) by the foreign bankers who intentionally created the toxic structured notes and sold them to protect their CDS exposure. DBS was sucked into it because its American CEO then, ex JP Morgan emulated his colleagues at Lehman, Morgan Stanely and Merrill Lynch etc. and created the toxic HN5 to protect its CDOs, which was reported to be about US$2.4 billion, held off balance sheet in Red Orchird Structured Assets (ROSA).

I suspect MAS does not have the personnel with the expertise to understand the complex structured products and its fraudulent nature to mount a criminal investigation.

symmetrix said...

I supect many investors may have made reports to the Police and/or CAD regarding a possible criminal offence being created in the sale of CLNs. Perhaps those investors may wish to share the status of the investigations. Of course, they may sumarise only the non-confidential info.

Anonymous said...

They not only sit back and do nothing, they are actually an active party to it. For years, people have warned against this practice of partnering with foreign parties to rip off its own local citizens. The collective wealth and savings of the local population is the value that was propositioned to these foreign talents. The deal is to farm the local community in return for their establishment in the local community. So how to act when the deal goes through? It is part of the agreement!

Anonymous said...

Mr Tan,
bad things always happen to those who always take shortcut to success. Just like gambling, fate let you win first, and then quickly you lose hugely and miserably towards the end. Instead of organically growing as a financial hub to gain experience and knowledge, HK and Singapore are taking shortcut to acquire quick capital to boost GDP and economic growth at the expense of rationalities, and now paying the price dearly.

Anonymous said...

"If there was an intent to cheat by the creators of these structured products, it is the duty of the regulator to charge them for cheating and put them into jail."

I wonder too how can these creators be jailed when at the top of DBS bank and many banks including Citibank, merril Lynch etc include ministers and statesman (isn't LKY special advisor to Citibank ? Isn't Citibank paying LKY annually just to make deal easy to go through ?). There is obvious conflict of interest when gahmen hold business position and approving deals that conflict with country interest.

Anonymous said...

I agree MAS cannot just sit by and do nothing.

Tan Kin Lian said...

Here is my reply to the comment at 7:25 pm

This is my hypothesis. In the earlier years, the hedge funds were buying the swaps. Later, the hedge funds declined to buy these swaps, when things got bad. They are sophisticated investors who can smell a rat.

The investment banks had to look for another avenue, as they were stuck with the swaps. Hence, they design the structured notes and sold them to the financial hubs, such as Singapore and HK.

Tan Kin Lian said...

In many countries, the authority is taking steps to sue the investment banks for selling the toxic products to the retail public. I hope that the Singapore authority will take similar action. Better late than never.

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