Saturday, May 30, 2009

Puzzle: The Bicycles and the Fly

Two boys on bicycles, 20 miles apart, began racing direclty toward each other.The instant they started, a fly on the handle bar of one bicycle started flying straight towards the other cyclist. As soon as it reached the other handle bar it turned and started back. The fly flew back and forth in this way, from handle bar to handle bar, until the two bicycles met.

If each bicycle had a constant speed of 10 miles an hour, and the fly flew at a constant speed of 15 miles an  hour, how far did the fly fly?

Give your answer here

Less than 2 min: excellent
2 to 5 mins: good
5 to 10 mins: fair
Above 10 mins: took so long?

Engineer Quiz

 It is said that engineers take 3 minutes to resolve this,  architects 3 hours and doctors 6 hours.

What is the 6th number?
 1, 2, 6, 42, 1806, ________?    So what is the next number???

Give your answer

Check the answer here.

SCMP:400 investors lose millions in echo of minibonds scandal

30 May 2009

In a disturbing echo of the Lehman minibonds scandal, the Hong Kong Monetary Authority has received more than 400 complaints from people who have lost hundreds of millions of dollars on a complex credit-linked product designed and sold by US investment bank Morgan Stanley.

The bank sold HK$2.1 billion of the products, called Octave notes, through 16 local retail banks, including ABN Amro, Bank of China (Hong Kong) and Wing Lung, between 2004 and 2007. Eighteen series of the notes were sold, of which 10 have lost more than 90 per cent of their value. Three - series 10, 11 and 12 - are worthless.

The HKMA revealed the complaints yesterday. It said the banks had sold the Octave notes to about 8,300 customers.

Lawmaker Regina Ip Lau Suk-yee called yesterday for much stronger regulation of financial products sold to retail investors.

She said she had been contacted by people who had suffered big losses on the Morgan Stanley products but had not understood their nature. "The people who have contacted me are ordinary grass-roots people. They are not wealthy," she said.

Like most minibonds, the Octave notes contain synthetic collateralised debt obligations (CDOs), which in the United States and Europe are sold only to professional investors.

"They [Octave investors] sounded very similar to the Lehman investors, who didn't know the products they bought were so risky," Mrs Ip said.

Some 48,000 Hongkongers lost most of the HK$20 billion they invested in minibonds issued or guaranteed by Lehman Brothers when the bank collapsed in September.

Synthetic CDOs are complex, conceptual products that mimic the financial health of a pool of companies. When businesses collapse, the CDOs lose value. Many of the Octave notes are virtually worthless because they were connected to the financial performance of firms that went bust.

Information that Morgan Stanley has posted on a dedicated Octave website illustrates the toxic mess.

Octave series 21, for example, is now worth 0.37 HK cents per dollar invested. It contained a CDO linked to the financial performance of some very troubled companies. These include Icelandic bank Glitnir, which collapsed in October, and US carmaker Chrysler, which entered bankruptcy protection on April 30. Notes that were priced at a fraction of their original value had a high chance of becoming worthless soon, informed sources said.

Only one Octave note is trading at anything approaching a healthy valuation. Series one, issued in 2004, is priced at 68 HK cents per dollar invested.

A spokesman for the regulator said it had taken steps to stop such a debacle recurring. "The HKMA has taken a number of steps, including the issuance of circulars and reminders, to ensure that banks implement adequate measures to manage the risks associated with retail investment products," he said.

The regulator has also asked banks to keep their relationship managers well briefed so they can handle customer inquiries.

A new era for capitalism

“Capitalism is changing in fundamental ways. For many years to come, what’s happening will affect the relationship between business and government, between taxpayers and the private sector, between employers and employees, between investors and companies. … A new capitalism is likely to emerge from the rubble.” 
- Robert Peston, business editor, BBC

“Derivatives,” said Warren Buffet, a renowned US investor, “are the financial equivalent of weapons of mass destruction.” He has certainly been proved right, with failing banks around the world showing that opaque financial instruments cannot mask the effect of reckless lending. After a lull in which it seemed that the rest of the economy might just avoid the worst effects of the banking crisis that started in August 2007, consumer demand, manufacturing and trade have all fallen precipitously and the global economy is in the grip of the worst downturn since the 1930s. After close to 30 years of light-touch regulation, globalisation and free-market binges, during which some politicians claimed to have tamed the business cycle, many commentators have now suggested that capitalism itself is entering a new phase.
In this report, the Economist Intelligence Unit examines the views of the people who own and manage the world’s businesses. Has capitalism changed, and if so, what might the new landscape look like? How will organisations adjust as a result of the crisis? Do business people support the actions taken to stem the crisis and do they favour expanding the government’s remit beyond the banking sector? To answer these questions, we conducted a survey of more than 400 senior business people in companies around the world. We supplemented the findings with interviews with experts, analysts and executives, as well as analysis from our editorial team.
The most striking finding is that almost 60% of respondents agree that the current crisis has “fundamentally changed” capitalism. According to one respondent, “Much as the Great Depression did in the 1930s, this crisis will permanently change the way governments and businesses view the world.” In summary, the survey respondents believe that there will be more government oversight, more economic nationalism, less risk-taking and slower growth. Decision-making within businesses will reflect a new reality, as frugal customers and state regulators hold sway. The respondents support emergency intervention in the banking sector, but their opinions are more conservative when it comes to further reform, such as outright nationalisation of other key industries, creating so-called bad banks that buy and ring-fence toxic debts, or limits on executive pay and bonuses. 

Rights issues - risk to small shareholders

During the recent credit crisis, many listed companies are have rights issue to raise additional capital. The new shares are issued at a lower price than the existing shares. This will cause the existing shares to be diluted and the price to fall.

Here is an example. If the share price is $4, and new shares are being issued at $2 (on the basis of 1 new share for 1 old share), the share price is expected to drop to $3 after the new shares are issued. This is caused by "diluation".

The practice of rights issue has the following risk to small policyholders:

a) Difficulty in finding the additional money to take up the new shares. If you are offered to 10,000 new shares at $2, you have to find $20,000 to take up these shares. If you are not able to find this spare cash, you can sell the rights during a certain period.  In theory, the rights should be worth the expected drop in the price of the old shares.

b) Oversight. You may not be aware of the rights issue and you forget to take it up or to sell the rights. This will cause your investments to drop in value, as the avlue of the old shares would have dropped due to dilution. This oversight is easy to happen, as you may be busy with work or overseas, when the rights issue are announced.

At each rights issue, there will be a certain proportion of shareholders who fail to take up or selll the rights due to oversight. These investors lose out and the benefit is given to other shareholders who take up the new shares at the lower price. (In some companies, the directors take up these excess shares).

To avoid this risk, it is better for small investors to invest in a professionally managed fund, such as a ETF (exchange traded fund).  The professional managers will take care of the work of monitoring the investments, including collecting the dividends, subscribing to rights issues and other matters.


Thursday, May 28, 2009

Political changes in Singapore

What are your views about the proposed political changes announced by Prime Minister Lee? Give your views here.

Here are the survey results (48 replies).

Wednesday, May 27, 2009

Zurich Vista Plan

A few policyholders have invested in the Zurich Vista plan. They are now unhappy that they have not been informed about the high surrender charges and other features of the plan. They wish to consider appropriate action.  If you wish to join them, give your particulars here.

Tuesday, May 26, 2009

Monday, May 25, 2009

Tax incentive and commission

In some countries, there is tax incentive for saving in an insurance policy or to create an educational fund for a child. People are not aware about this incentive. The adviser helps them to gain access to the incentive through a suitable plan. The commission earned by the adviser is more than covered by the tax incentive. The customer gains from the plan, after paying the commission. All parties benefit.

In  Singapore, where there is no tax incentive, the commission paid to the adviser is a burden to the consumer. It reduces the net return to the consumer. Some insurance companies do not care about the consumer and are willing to sell "poor value" products to them. They train their agents to "convince" the customer to buy these products. It is enethical to take advantage of the igonorance of the consumer.

All financial products with high upfront fees give poor value to the consumer. They include  investment linked products, structured products,  endowment and whole life policies.

Without any tax incentive, there is no justification for high commissions to be paid to financial advisers who sell the financial products. There is a pressing need for the regulator to set limits to the commissions that can be paid, so that the consumer's are given a fair deal.

Tan Kin Lian

Online Sudoku

Try this website for Sudoku games at 4 different levels and choice of symbols. Try solving with flowers. 

BOC HK's mini-bond holders demand settlement ASAP

May. 25, 2009 (China Knowledge) - Bank of China (Hong Kong) Ltd, the largest distributor of Lehman Brothers-linked products in Hong Kong, has been asked by hundreds of Lehman mini-bond holders to settle their cases faster, the Standard reported.

On Thursday the mini-bond holders gathered outside the Hong Kong Convention and Exhibition Centre, Wan Chai, during the annual meeting at the company's headquarters there, asking the bank to resolve the issue with the mini-bonds as soon as possible.

The bank has already deployed resources to deal with the matter, said President He Guangbei, adding that the bank is handling the issue actively and seriously and expects to wrap up the cases soon. The bank has set up an internal audit committee and continues to discuss the matter with regulators. 

However, he provided no timetable.

Sunday, May 24, 2009

Brain Workout in The New Paper

A few readers have asked me where they can buy the TKL Intelligence Quiz book. The bookstores are listed in this website. Several have asked when the next volume will be available. They can also try the online version of the quiz here.

Lesson in leadership from the world of football

What makes Alex Ferguson great? Read this article.

Terminating an existing life policy

Dear Mr. Tan,

I have bought a vivolife policy 2 yrs ago. Recently, I am thinking of increasing my coverage as I am planning to start a family soon.

After reading your blog, I am thinking of the following: switch to term plan and invest my savings on equity personally. Do you think it's advisable?

Please read this FAQ before you take your decision to terminate the Vivolife policy.

If you terminate the policy now, you will lose a large part of what you have paid during the past two years. If you look at the cost for the next five or ten years, you can get a better idea about the advantages of making a switch.

You should also find out the cost of the term insurance policy and critical illness coverage.

It is advisable to take up a term insurance policy, rather than a whole life policy, but a decision to terminate an existing whole life policy has to be considered separately on its merits.

BBC: Expense row minister steps down

Read this.

Salary and perks of MPs in Europe

Read this.

What to do about your endowment policy

This article is written in the context of the situation in the UK. Many of the points are valid when applied to Singapore.

Lehman Role Probed in Selling Securities

onlineWSJ, 21 May

The Justice Department has questioned several former executives at Lehman Brothers Holdings Inc. as part of its criminal investigation into whether they sold supposedly safe, liquid securities to clients while knowing that the market for the securities was drying up.

Prosecutors from the U.S. attorney's office in Brooklyn and lawyers from the Securities and Exchange Commission in recent weeks interviewed several former executives who ran Lehman's auction-rate-securities business, these people said. Auction-rate securities are short-term debt instruments in which the interest rates reset at periodic auctions.

The Standard: Minibond fury hits BOCHK

22 May 2009
Hundreds of Lehman minibond holders vented their anger at Bank of China (Hong Kong) (2388) and demanded a faster settlement although the lender said more than 2,000 cases have been resolved. BOCHK was the largest distributor of the Lehman Brothers-linked products in the territory.

The minibond holders yesterday gathered outside the Hong Kong Convention and Exhibition Centre, Wan Chai, where the bank was holding its annual shareholders' meeting, as well as at its headquarters, demanding that cases be wrapped up soon.

Bank management came under fire at the meeting with half the questions related to the minibonds controversy.

``You said you are concerned about the issue, but you are just paying lip service,'' one shareholder said.

President He Guangbei replied that the bank has already deployed resources to deal with the matter.

``We are handling the issue actively and seriously and hope to settle the cases as soon as possible,'' He said.

An internal audit committee has been set up, and discussions with regulators are continuing.

But He could not give a settlement timetable.

The bank denied speeding up settlements and raising the starting point for resolving the issue because of political pressure _ a claim made by Peter Chan Kwong-yue, chairman of the Alliance of Lehman Brothers Victims.

``We are handling each case individually as each has a different claims level,'' He said.

Chan claimed that since April 1 the bank has sped up the process and raised the starting level of claims from 10-20 percent to 50 percent to avoid protests on the anniversary of the handover.

The BOCHK chief declined to say whether it will have to fork out more on Lehman-related issues in 2009, after last year's HK$700 million.

``The expenses last year covered costs that might also be incurred this year,'' He said.

Separately, the bank said it has no plans as yet to issue yuan bonds locally and its parent, Bank of China (3988), has no plans to privatize BOCHK. - Singapore's Temasek defends costly Bank of America exit

By Kevin Lim and Saeed Azhar

SINGAPORE (Reuters) - Singapore's Temasek defended its money-losing exit from Bank of America , saying the U.S.-centric bank did not fit its investment criteria and the risk was perceived to be greater than the expected return.

The explanation, a rarity for the state investor, came in a letter to major Singapore newspapers after the loss on BofA attracted fierce criticism from the usually muted pro-government local media, investors and independent blogs, which noted BofA shares have rallied more than 70 percent after Temasek's exit.

The losses are also expected to be discussed when Singapore's Parliament convenes next week.

Temasek, which is headed by Ho Ching, the wife of Singapore's prime minister, sold its 3 percent stake in BofA in the first quarter after converting its Merrill shares into BofA in January. Temasek has not said how much it lost in the process, but Reuters estimated the loss was more than $3 billion.

Temasek announced in February that Ho will step down and be replaced by Chip Goodyear, the former CEO of BHP Billiton , on October 1.

"Our investment thesis had changed from Merrill's specific businesses to the more diversified BoA linkage to the broader U.S. economy. The risk-return environment had also changed substantially," Myrna Thomas, managing director for corporate affairs, said in the letter.

Temasek's aim is to ensure that its portfolio delivers returns that are higher than the cost of capital employed on a risk-adjusted basis, Thomas said.

"We may choose to divest an investment, even at a loss, to optimize our risk or portfolio exposure, or if there are better opportunities elsewhere or later," she added.

Temasek, which like other sovereign wealth funds, plowed billions into Merrill Lynch in the early phase of the credit crisis, saw the value of its portfolio plunge 31 percent to S$127 billion between March 31 and Nov 30 last year during the severe market turmoil.


Financial investments accounted for 40 percent of its portfolio.

"The letter doesn't give the answer that everybody is asking. How much did they lose?," Leong Sze Hian, president of the Society of Financial Services Professionals, told Reuters.

The exact losses are difficult to quantify because Temasek had also offloaded about 30 million Merrill shares last year in smaller lots, reducing its exposure to the investment bank by the time BofA took over Merrill.

Conraj Raj, editor-at-large at the Today newspaper in Singapore, threw the spotlight on the sovereign wealth fund's stated strategy of taking a long-term view of its investments.

"After all, it has been drummed into us ad nauseam that both Temasek and its cousin, the Government of Singapore Investment Corporation, invest for the long term with a time horizon that could stretch for as long as 50 years," he wrote on May 18.

"Whatever happened to the sovereign wealth fund's (SWF) strategy of taking a long-term view of its investments?"

Singapore's bigger sovereign wealth fund, GIC, on the other hand said it was a long-term investor in Citigroup and UBS .

"It is difficult to understand why a long-term investor like Temasek was willing to stick with a dud like Australia's ABC Learning centers to the end, but did not try to exercise a little bit more patience with a U.S. government-backed entity like BofA," Png Eng Huat wrote in a letter to Straits Times forum.

"The U.S. government has stated clearly that it will not nationalize BofA even though it is technically the largest shareholder of the bank."

(Editing by Muralikumar Anantharaman)

China Daily:Settlements complicate Lehman inquiry

HONG KONG: Investigations of financial institutions that sold Lehman Brothers minibonds became more difficult after some complainants in the case reached separate settlements, Hong Kong Monetary Authority chief executive Joseph Yam said yesterday.

Yam made the revelation Friday as he was grilled by legislators in the Legislative Council subcommittee hearing on the Lehman Brothers products disaster.

"We can still get the information we need from banks," he said. "However, we cannot make verification with the investors (under terms of settlement agreements, investors are prohibited from disclosing information about their individual cases). That makes our investigation difficult."

Yam's revelation immediately drew criticism from subcommittee members. James To accused the authority of protecting the banks.

"How can you let this happen to hinder your investigation?" he demanded.

Yam defended the authority, countering that it could not stop investors from settling their complaints with the banks that sold the instruments.

"If we imposed restrictions on banks because of the difficulty involved in the investigations, the investors may not be able to reach settlements and get back their money. That is not fair to them," he said.

Yam, who will retire in October, has been grilled by the subcommittee on six occasions. Friday's hearing saw repetition of earlier incidents, with Yam's testimony interrupted by shouts from angry investors in the public gallery. Subcommittee chairman Raymond Ho Chung-tai was forced to call five-minute adjournments on two occasions so that the furor from the gallery could be quieted.

Financial services sector legislator Chim Pui-chung and Hong Kong Island constituency legislator Regina Ip said the authority failed to prevent banks from employing hard-sell tactics to persuade investors to buy Lehman Brothers financial products.

"One of the investors purchased the product through her daughter working in the banks. The daughter has not gone through any training. The bank hires her, and she is just trying hard to sell the products to her relatives as well. It is a problem for banks to set a selling quota for the staff to achieve," she said.

Yam reiterated that the authority does not tolerate irregular sales practices and will deal with the matter seriously.

"If the investors, under the cold call practice, are not interested in the product, and the investors purchased the products simply because the banks or agents called them saying they have money in their accounts, this will not be tolerated," he said.

He said the authority asked about 50 banks to conduct self-assessments in 2008.

He added that the authority would be more thorough when assessing banks in the future.

The authority deputy chief executive Choi Yiu-kwan will give evidence at a hearing of the subcommittee in June. But chairman Ho said legislators intend to recall Yam to give further evidence after Choi's testimony.

SCMP:Yam denies shielding banks from scrutiny

The Monetary Authority cannot stop banks that settle with minibond investors inserting clauses requiring that they drop their complaints and cease disclosing information about their case, its chief executive told lawmakers yesterday.

Joseph Yam Chi-kwong denied he was shielding banks from scrutiny.

He was testifying for the sixth time to the Legislative Council panel inquiring into the alleged mis-selling by banks of credit-linked derivatives, including minibonds, issued or guaranteed by Lehman Brothers. At the end of last year, three months after the American bank filed for bankruptcy - causing 48,000 Hong Kong investors to lose much or all of the HK$20 billion they put into such products - 17 banks paid HK$257 million to settle 616 investors' claims.

"My view is that the HKMA doesn't have any power to interfere with the relationship between the banks and their clients, even if an investor has promised the bank to withdraw their complaint or to not make available further information," Mr Yam told the subcommittee.

"We can still get hold of the information we require from the banks. Of course, if we cannot get information from the investors to corroborate, then it would be more difficult to proceed with the investigation."

He said he would seek legal advice as to whether the inclusion of such conditions in settlements with investors was against the public interest.

A spokesman for the authority said the outcome of such settlements would not affect its investigations.

The authority has received nearly 21,000 complaints about banks' sale of minibonds. Despite their name, minibonds are complex products that derive part of their value from underlying credit instruments.

An authority circular issued in March said banks should not include in settlement agreements clauses that stopped investors disclosing relevant information to regulators.

Democratic Party lawmaker James To Kun-sun called on Mr Yam to reconsider allowing banks to impose such conditions, since they might interfere with the authority's statutory duty to regulate banks. Mr Yam said he would reconsider, but insisted that restricting banks would be unfair if it affected minibond investors' ability to reach a settlement.

Questioned by lawmakers yesterday, Mr Yam sought to show that the authority was on top of the situation. Inspections of bank activities continued between 2003 and 2007 even though there were not many cases of suspected mis-selling of such derivatives, he said. Around the middle of last year, the authority identified more cases of suspected mis-selling. In February last year, the authority set out to investigate 11 banks selling high-risk derivatives, but launched investigations into only four.

Yesterday's Legco session was interrupted three times by rowdy spectators in the public gallery calling for Mr Yam to step down. He will retire on October 1 after 16 years in the job.

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