Tan Kin Lian's Blog: A expert view about Structured Products

Sunday, September 21, 2008

A expert view about Structured Products

Hi Mr. Tan,
Structured products are essentially investment instruments engineered by so called "financial engineers" using complex mathematical models (models which works 9 out of 10 years, and the other 1 year, it blows up spectacularly).

These products almost always results in the investor underwriting/selling an financial options or insurance in exchange for an small fixed premium, (e.g. dual currency account, mini-bonds insuring credit events). This is the main reason I have been avoiding RMs (i.e relationship managers) marketing their structured products, i.e. I don't want to underwrite a huge risk for a small premium.

Let me elaborate on why individual investors should never sell/"underwrite" financial options/insurance:

- the losses can be catastrophic to the investor in return for a small fixed return eg something happens, your losses are very high and nothing happens, your return is just 3% more.. individuals simply do not have the capacity to take on such risks (evidently even AIG don't)

- the general public simply do not have the neccesary training/finance knowledge to understand these products and the risks involved.. those that do, probably won't invest in them..

- financial markets have a very high correlation during extreme events, diminishing the effects of diversification

- banks also have an incentive to push these products, because there is a lot of demand for financial options/insurance from hedge funds, banks, investment-banks. Effectively, these financial insurances are underwritten by the unsuspecting public and subsequently passed to the bank's clients. The bank made a spread or fee from both sides and the RM made a nice commission.

MAS failed in regulating these practices, and the banks and RMs put the life savings of investors at risk because of their own fat pockets.

I urge the financial journalists to find out:
- what proportion of bankers, RMs actually invested in these structured products (putting their own money where their mouth is)?
- where has the losses gone too?

Come on, guys at ST put your journalist professionalism and critical thinking to use!!

ym

6 comments:

Wealth Journey said...: I watch on Bloomberg news .. A senator was flabberghasted that they are punishing the banks who have followed the rules by taking in bad debts from banks who were risking it all for higher profits.

I think it would be good if the bailout can be in two parts:-
1) the RTC style entity will take in the bad debts
2) the financial entities which wants the bad debt to be managed will have to cede control of itself to the govt. When financial system is stable and the financial entity can stand on its own, the govt can relist the company and reap the rewards and funneled the profits to its deserving tax payers.

Likewise... for our own mini-crisis of confidence in structured products and banks, the MAS should think of ways to reward and punish accordingly.; September 21, 2008 4:07 PM
Weng Mao Fa said...: Successful rate of a new business/product is usually LESS THAN 0.5

Will you buy this medicine?
Is the medicine clinical tested?

YES, if it is a "Financial Vigrapill". Many investors did it !

N0, take only "Durian" (CPF Ordinary/Special/Retiree Accounts). Please tonight !; September 21, 2008 4:35 PM
David said...: MAS wants to stimulate financial and funds growth, so it does not want to have a heavy hand in regulating.

Even when casinos are being allowed to stimulate economic growth, what less can you expect?

Folks must need to be smart and not be tempted to avoid losses. If you want to sleep well, don't be greedy even for the 4,5 or 6% return.; September 21, 2008 4:40 PM
Lucky Tan said...: I was thinking one way is if they move bad stuff to RTC for them to make good any losses to the tax payer from their future income.

Anerican govt cannot do nothing but the cannot lose tax payers money. The right way ahead is force the banks to sign away a portion of their future income to get federal aid.

The US govt debt is already horrendous. Watch the documentary IOUSA to get a good understanding of USA's fiscal situation.; September 21, 2008 7:57 PM
zhummmeng said...: You think the press would expose the sales consultants? You think they will dig up the dirt of the banks and the insurance companies? They will be shooting their own foot.
Hey!!! Advertising revenue is at stake. Investigative journalism is actually selective journalism. MSM might appease you with a just a mention, just reporting at the best.
The best is still here , no holds barred. The truth is found here to the last detail leaving nothing unturned. This is true journalism.
So you can forget about the press helping you guys. It is best on your own.
March to the SPEAKERS' CORNER and demonstrate; September 21, 2008 8:13 PM
Unknown said...: Investors need to learn not to trust their retirement money on complex products that they can't understand. It's ok for your gambling money (it's less wasteful than lottery)... but not your whole retirement money.; September 24, 2008 1:44 PM