Tan Kin Lian's Blog: Special treatment for Minibonds

Friday, October 02, 2009

Special treatment for Minibonds

There is a difference between Minibonds and the other credit-linked notes (i.e. Pinnacle Notes, High Notes).

For Minibonds, the credit default swaps did not fail. Only the swap counter-party (i.e. Lehman subsidiary) failed due to the liquidation of Lehman Brothers. PriceWaterhouseCoopers was appointed to arrange for the underlying assets to be released from the swap counter party and tranferred to another investment bank to handle the settlement.

For some notes, such as High Notes 5, Lehman Brothers was named as a reference entity for the credit default swap. The failure of Lehman Brothers caused the entire investment to be worthless.

For the Pinnacle Notes, the failure of a certain number of the underlying assets will cause a substantial or total loss of the investments. The investors have to wait and hope that these underlying assets do not fail. If they do, the investments will also be worthless.

It is not possible for any action to be taken to save the investments in the Pinnacle Notes, except to sell the notes to another party who is willing to take the gamble that it will not fail.

Different series of each credit linked notes are invested in different underlying assets and have different structures. It is difficult to make a general statement regarding these notes.

The Minibond class actions, led by Conrad Campos, are mainly to sue the distributors for failing in their duty to give proper advice to the investors. This is a separate matter from realising the value of the underlying assets.

For the same reason, the Hong Kong settlement only covered the Minibonds and not the other credit linked notes.

Tan Kin Lian

22 comments:

Anonymous said...: Mr Tan,

Do you know who will bear the cost of unwinding the underlying assets? Will the payment to trustee, LBSF, PWC, Receivers and lawyers be make by the investors alone? This would be diluting the value much further after the drop in market value.

I would think it is reasonable to expect the 10 FI that sold minibond to contribute the 5% commission they earned from sale and MAS to co-share as well since these parties are equally guilty in creating the fiasco; October 02, 2009 8:42 AM
Anonymous said...: Not to forget the cost of appointing the global large investment bank. With the expected exorbitant fee, the minibond holders will likely be left with little. Again, the retail folks will be made to lose while all the financial institutions make a 2nd round from this exercise.; October 02, 2009 9:07 AM
Anonymous said...: Would PriceWaterhouseCoopers be charging a fee for doing this job? This would eat into the remaining values of these minibombs.; October 02, 2009 10:46 AM
Vincent Sear said...: May I share a real life story of narrow escape from financial disaster here. My aunt is a widow with a daughter in primary school. My late uncle left behind a paidup 3-room flat and relatively sizeable insurance proceeds.

My aunt left most of it in 5-year single premium policies (those years average >5% p.a.). When policies matured and proceeds were paid to her bank account, the bank immediately prospected her for all kinds of minibonds, high notes etc. Her agent wasn't sleeping and prospected her to buy new single premiums too, but then he was only able to offer 3% compared to bank structured products at 5%.

She approached me for an opinion with some brochures. (She's Chinese and Thai speaking, speaks no English). I read them over and told her, even I find them very complicated and hard to understand for sure. Terms like "protected" and "collaterised" are scattered all over. I said personally I won't invest in anything without understanding.

She decided against investing in the structured products and renewed her single premium at a lower projected rate. Years passed by fast and the next maturity is coming up soon. She's looking forward to the proceeds instead of looking at complaints and lawsuits.; October 02, 2009 10:51 AM
Anonymous said...: She is lucky to have you to look out for her.

We put too much trust in our FA and our FA, even though sincere, does not know that MB is of very high risk because they were trained by Lehman Brothers to believe it is safe and low risk. The FI is Philips Securities. Now, the very security house said those MB investors have read the pricing statement and prospectus thus they fully understand the risk when they bought the product. This irresponsible action just threw it's 34 years of history/reputation down the drain because they are blaming their customers & demanding return of commission from their FAs. Good luck to their future in Sgp. I know I am putting them together with MAS and the Govt for being totally NG organizations.; October 02, 2009 11:50 AM
Vincent Sear said...: Yes, agree. The training they received plays a big part in their approach and tactics.; October 02, 2009 1:23 PM
Anonymous said...: While it is good that minibond holders will get some money back, I am concerned that eventually we will receive only peanuts maybe $50 or less per $5,000 invested, the value of the underlying assets must be so low now with the recession.; October 02, 2009 1:29 PM
Anonymous said...: MR TAN KIN LIAN

I really appreciate you sharing knowledge. I am touched. If we look at history, mankind will only move forward when men with knowledge and conviction speak up. Just like the late Qing Dynasty, there are many scholars spoke out and shared thier ideals. We see the fruits of China today, because many of them shared their knowledge openly one hundred years ago.

You are the true son of Singapore.

On another note, the products are really complex. I am not sure whether the bankers really understand their are selling.

From Cashew Nut; October 02, 2009 2:50 PM
Anonymous said...: We cannot speculate how much the collateral is left behind. We do not have the expertise to understand the whole mechanics of the product. It is highly complicated. If necessary, join some group to seek professional advise to protect your interest.; October 02, 2009 4:04 PM
Anonymous said...: I do not have too high hopes. For fear this is another wayang. Buy some more time to wear down the investors.

Imagine. Still need to use part of the proceeds to pay an undisclosed sum to Lehman Brothers Special Financing Inc (LBSF).

Still need to pay investment banks, lawyers, PWC. Pui!; October 02, 2009 5:56 PM
Anonymous said...: Look on the brighter side. Take the money from the liquidation and use a portion of it to join MIAG and sue the FIs. Sue them for irresponsible actions of not doing a proper due deligient as well as fooling the retail investors about the product being as safe as Fixed Deposit.; October 02, 2009 7:38 PM
Anonymous said...: Business Times:

"Minibond saga nears closure with settlement"

How can BT call this a closure once liquidation payout is done!!!!!

We must continue to pursue this matter to ensure all MB investors are properly compensated. At least similar to Hong Kong MB investors.; October 02, 2009 9:06 PM
Anonymous said...: Don't dream.
You know how much I received from Pinnacle for "early redemption"???
It is 0.5%. Can forget about it.

Don't pin your hope on so call "small money back". It may be 1 or 2 %.
What is the point???
If it is less than 5%,ight as well forget about it!!!!!; October 02, 2009 9:20 PM
Anonymous said...: Nobody works for free. If you know of someone like that, let me know, I have a lot of work for the person to do.

Certainly the involved parties, LBSF, PWC et al, have to be paid according to their rates. If you want cheaper fees, look for less reputable groups - maybe your next door, Ah Long Auditors.

Willing buyer and willing seller. This is a free market. If my next life I can be a banker, I would. If my children can be bankers, I would support it. High stress but earns super lots of money. What I earn in 5 years takes 90% of the population a lifetime to slog for. We are the ones that make most money, most respected, and greatly desired, in good times and bad times. I am sure every one wants to have banker friends. You can be complaining about the products, but hey money speaks loud and clear.

And I am honest about it and not hypocritical. If people are greedy and wants higher returns, it is a need to be filled. All high returns vehicles comes with high risk. Everytime I highlight it, the more people wants it. How amazinging paradoxical!; October 03, 2009 10:31 AM
Sim said...: This is where I sense hypocrisy. The very people who complained that 3% return is low are complaining that their high return investments have vanished.

It is always the other person that's greedy.

If all CDOs end up this way, when will the CDO be actually exercised? It's like a bank bought insurance, end up bankrupt, want to claim, then the insurer complains to monetary authority?

Yes, there may be genuine cases of misrepresentation by brokers. However, the noisiest people are not the elderly victims with their life savings (they should be compensated!!), but the hypocrits that expect high returns and no risk (they should lose their money).

Vincent did a good job by discouraging her from "investing" for "high returns". Many people talk about "risk" as though it will never happen if you "put long enough".

Always read "potential return" as "potential loss". After that, consider if you really have the guts to take it.; October 04, 2009 12:30 AM
Anonymous said...: Since MAS is not doing anything in sueing the FIs and do nothing in relation with compensation to retail investors, all MB holders have to take legal action for justice. The legal action may be fruitless or partially compensated, a 100% of compensation may not achieved eventually.
On the other hand, PWC works for the residual value of MB and turns the value back to investors, is definitely a plus in addition to the legal action.
One point must be clear to PWC. The sale and all administration fees charged by PWC should be transparent,otherwise it will be pointless to proceed with the sale.
MAS should be held responsibility if anything goes wrong this time.; October 04, 2009 11:17 AM
Anonymous said...: There are many investment options available for a retail investor:
1)Fixed deposit: return is around 1.5%. (return of 1 risk of 1)
2)5 years Government bonds: return is around 2.33%.(return of 2 risk of 1, but is a long term investment)
3)Local banks preference shares: return is around 4% to 6%. (return of 3 risk of 3)
4)Unit trusts: long term returns is around 5%. (return of 3 risk of 3)
5)Blue chips share: long term returns is around 6% to 10%. (return of 4 risk of 4)
6)Trading of shares: the return could be more than 10% within weeks, this translates to yearly return of more than 100%. (return of 8 risk of 8)
7)Trading of speculative shares: the return could be more than 10% within days, this translates to yearly return of few hundred percents. (return of 9 risk of 9)

Minibond investment is a long term(5 years) financial product with return of 5% but the risk is as high as speculating in shares.
(return of 3 but risk of 9).; October 04, 2009 12:12 PM
Anonymous said...: "What I earn in 5 years takes 90% of the population a lifetime to slog for."

I don’t understand why these people (bankers) can make so much money, I thought their main duty is to take our (depositors) money and lend it to the borrowers (businesses).; October 05, 2009 2:00 PM
Vincent Sear said...: Sim puts it well, potential returns have to face off potential loss. Industry term is risk-reward ratio. High risk-reward ratio doesn't necessarily mean high reward eventually. The risk side of ratio may materialise instead.

Also, long term doesn't necessarily mean sure win, though to be fair, it usually does outnumber the chances of losses. Anyway, long term becoming wrong term has even happened to the likes of GIC and Temasek.; October 05, 2009 3:27 PM
Sim said...: Bankers earn money by putting their head on the chopping block for you. If the businesses and investors they lend to go broke and default, bankers may end up with worthless collateral or nothing. Look at the 90+ banks that collapsed in America. I don't label them as evil or bad for risking depositers money recklessly. They are human, drunk on cheap money from the central bank and deposit guarantees...

Just in case you think I'm bullcrapping about the number of collapsed banks...

http://www.financialexpress.com/news/us-bank-collapse-toll-touches-94-so-far-this-year/520225/; October 05, 2009 3:48 PM
Anonymous said...: "Bankers earn money by putting their head on the chopping Block for you."

When a bank fail, it is the bank shareholders and depositers who suffer the most.; October 06, 2009 8:41 AM
Anonymous said...: "high stress but earns super lots of money. What I earn in 5 years takes 90% of the population a lifetime to slog for."

My concerns is that to justify for that type of high pay, these people (bankers) may be forced to engage in those high risk ventures in order to obtain high returns.

But banks should not involve in high risk activities because they are keeping people's money.; October 06, 2009 2:11 PM