Tan Kin Lian's Blog: Reply to Ho Yew Kee

Friday, January 02, 2009

Reply to Ho Yew Kee

Sent to Straits Times on 13 December 2008, but not publised.

Editor
Forum Page
Straits Times

I refer to the letter by Mr. Ho Yew Kee entitled “A mistake to overreact” (ST, 13 Dec 2008).

Mr. Ho said, “It would be imprudent for the stewards of town council funds to play it safe and place their reserves in fixed deposits or government bonds, as the returns would not even offset the inflation rate.” He also said, “Corporate bonds provided a yield of 4 to 6 percent, but the corporate have different credit ratings”.

In my view, it would be prudent for the town councils to invest in corporate bonds, provided that the investments are spread over several corporate bonds to reduce the impact of the failure of some of these bonds.

In fact, over 10,000 people were sold the credit linked notes. They were misled into believing that they were investing in a basket of 5 to 8 of the entities, which were financially strong companies or sovereign governments.

They were told that if one entity should fail, they would only lose their invested sum on a proportionate basis. If 1 of 8 entities failed, their loss would be 12.5%.

They were shocked to learn later that they were actually selling credit insurance against the failure of any of these entities. If any single entity failed, their entire principal would be lost. Instead of spreading the risk proportionately over 8 entities, they were taking 8 times of the risk of any single bond!

In addition, their principal was actually invested in a portfolio of 100 to 150 underlying securities, which could comprise of collateralised debt obligations of lower rating. This has additional risk to the investors.

The combined risk of failure of “toxic” credit-linked notes is very high. This explains why many of these notes have failed totally, compared to bond funds.

The stewards of the town councils, who have access to professional advisers, should explain if they were aware about the nature of the credit-linked notes and if the return of 5% is insufficient to match the risk. If the town councils were also misled about the nature of these products, it is their fiduciary duty to take appropriate action to recover their loss.

Several local government bodies in the UK were also misled into investing in similar high-risk products. They took legal action and were able to obtain a court decision to rescind the contracts. I urge our town councils in Singapore to do the same.

Tan Kin Lian

37 comments:

Chan J C said...: Dear Mr. Tan

Thanks for sharing.

You mentioned that

"... Several local government bodies in the UK were also misled into investing in similar high-risk products. They took legal action and were able to obtain a court decision to rescind the contracts..."

Could you kindly post such cases for our reference?

Thank you sir.
JC; December 15, 2008 3:15 PM
Unknown said...: "Sent to Straits Times on 13 December 2008, but not publised."

There, THATS the response.; December 15, 2008 3:28 PM
Anonymous said...: Mr Tan,

I can understand why ST didn't publish it.

Because you describe the issues so clearly and simply and it hurts the other side because they cannot rebut it.

That's why it is good to turn to alternative media like the blogs and internet.

I hope the gahmen linked ST should be aware that this is not the past, but the internet age. Their policy on this is behaving like an ostrich.; December 15, 2008 3:33 PM
Anonymous said...: The 2% or any return rate published by the town council, does it factor in inflation?

If not, that could be a negative return rate and it is not worth keep the fund?; December 15, 2008 4:33 PM
Anonymous said...: Did they have the knowledge to keep and grow the fund ?
Were they misled into buying the products ?

They are in a Catch 22 position, but they are still not giving the public and residents a good answer !

It is so easy, answer A or B !
A) They are not competent enough.
B) They are also victims in the saga.
Sorry no choice "C".

We are still waiting for the truth.

Hope the MPs will follow up the issue.; December 15, 2008 5:49 PM
vertigoer said...: The thing is why does Town council have to horde our money?

http://www.channelnewsasia.com/stories/singaporelocalnews/view/390407/1/.html

S$4 million is 2.6 percent of Pasir Ris-Punggol.

That means they have a fund of S$153 million.

Do we need to spend S$153 million in a year for simple services?
http://www.prpg-tc.org.sg/cms/services.php

http://www.punggol.sg/forum/community_issues/pasir_ris_punggol_town_council_s4_million_exposure_to_lehman_brothers-t18993.0.html;msg64195#msg64195

From here, 80,000 household. means, TC is holding around $1912 of my money!

If not why, do they need to keep collecting so much of our cash?; December 15, 2008 6:16 PM
Anonymous said...: Just like the Town councils who thought they are buying a bucket of Corporate Bonds, we bought these MiniBond, High Notes and Pinnacle Notes because they sold them using the big name Corporations with AA+ ratings as "Bait" but they do not operate like Corporate Bond at all. If this is like corporate Bond that pays 5% interest, I am suppose to have the other Bonds in my Bucket even with one or two collapsed.; December 15, 2008 9:01 PM
Anonymous said...: The Straits Times is controlling information to the masses. This is dangerous as it is manipulating information to its ends. This has no place in a democratic society.; December 15, 2008 9:44 PM
Anonymous said...: Maybe the best approach is a super huge class action, unprecedented in the Singapore history of consumer protection. The key defendants shall include everyone who had a hand in perpetrating this debacle, from the sales people to the distributors and product originators.
The CEOs and senior managements of bankrupted corporations must be investigated and the guilty ones charged and punished for their sins.
After all, the long arm of the law is indeed long and unyielding, if only the governments have the resolve and spirit of co-operation in combating these frauds.

By RTA; December 15, 2008 10:22 PM
Anonymous said...: Mr. Tan

ST may have lost your mail.

Just try to send to them again and CC to MND. Mr. Mah will know what to do.

If ST really refuse to publish, you got no choice, but to seek help from TOC to put at their headline, more and more people are reading TOC now.; December 15, 2008 10:22 PM
Anonymous said...: Our Town Councils with deeper pockets, financial & legal advice at their disposal should in the first place initiate legal proceedings if they had been misled. Why are they so quiet?? Millions of dollars of tax-payers' monies are at stake!! Where is the transparency & accountability!!!; December 16, 2008 12:37 AM
Anonymous said...: Well honestly even if the town councils take legal action our courts will not rule in their favour as our courts are also gahmen linked and hence, the court will not rule against the gahmen.; December 16, 2008 9:30 PM
Junyang said...: Banks are big advertisers for ST. I presume they do not want to risk alienating their big clients even if it means that they hold back information that is newsworthy.

It is difficult for any mass media that generates revenue from advertisers to be unbiased.; December 18, 2008 1:23 AM
Anonymous said...: Mr Tan

[A] Excellent reply. Grave regret for not being published by ST.

[B] I have another concern.
- How can Town Council accumulates so much reserves in the first place.
- How come the reserves was not published to residents. I stay in an OLD CONDO and the accounts are presented regularly.

From CASHEW NUT; December 26, 2008 5:56 PM
Anonymous said...: Dear All,

It was never my intention to side the government or town council for the losses but to provide a view that we should not be far too hard on the volunteers who had dedicated their time to serve in the TC.

Guess, there are two possible tests (where one is impossible to perform now):

a. What would we have done if we are to invest the reserves of the TC then? (Context: inflation runs at 4% to 6.5%). Hindsight is 20/20.

b. What do we do now with the reserve given the fact that fixed deposit rate is close to zero and there may be good opportunities for cherry picking but we may also lose our shirts? What would we do if we are to serve in the TC now in the context of this furore?

I assure you that it is never my intention to defend the TC but to ensure that people do not get discouraged that one mistake may have wiped out their entire life or years of good works as volunteers in TC. No wonder most trustees or volunteers would not even want to explore "higher" returns for reserves because such efforts have little "upside" (ie. people would not thank you for the service because this is what you are supposed to do, this is tax payer money, this is charity dollars etc.....) but plenty of downside (ie. "why did you not be more prudent and careful when you invest", "you should know better..."). Or in the words of a writer "Who is going to answer for the losses ? Without a system of accountability in place, how can residents be assured that a repeat mistake will not occur again?"

Servng in the TC becomes a catch22 situation. If you dont get higher yield, you are not doing your job. If you chased after higher yield investment, you bear higher risk and if you lose, money, you are not being careful or in the words of one writer that the volunteers are either incompetent or have been misled.

Barring the complexities of the instruments which resulted in the losses, we faced an epic episode in the history of finance, namely, the collapsed of some of the largest investment banks in the world. No one would have foreseen that.

I apologise if my letter caused you anguish or any misunderstanding in my intention.

Wishing you a happy new year.

Yew Kee; January 01, 2009 10:32 PM
vertigoer said...: Mr Ho, if TC don't have large reserve then there won't be a situation on a) and b) issue.

If TC was only holding $1 million dollars in reserve, I don't mind $12.50 (80,000 household) be left to option a).

Mr Ho, please comment on this.; January 02, 2009 6:39 AM
Tan Kin Lian said...: Dear Ho Yew Kee

Thank you for giving a reply in my blog.

I do not blame the Town Council for making the investment. Like the ordinary folks, they have been misled.

Having been misled, it is their duty to take legal action against the distributor (for not giving proper information on the product) and against their professional advisers.

The Town Council should not just let the matter passed.

I repeat the calls in the last two paragraphs of my letter:

The stewards of the town councils, who have access to professional advisers, should explain if they were aware about the nature of the credit-linked notes and if the return of 5% is insufficient to match the risk. If the town councils were also misled about the nature of these products, it is their fiduciary duty to take appropriate action to recover their loss.

Several local government bodies in the UK were also misled into investing in similar high-risk products. They took legal action and were able to obtain a court decision to rescind the contracts. I urge our town councils in Singapore to do the same.; January 02, 2009 8:37 AM
Anonymous said...: Ho Yew Kee has got everything wrong.

It is about Credit-linked Notes sold to 'Unsuitable' persons - the ordinary people.

It is about TC's investing in risky CLNs that both principal & invest payment will get wiped out! Do not simply cite inflation as an excuse, please be clear that it is the CLNs that TC decided that the people's money should take a gamble that matter!

Know what U talk and Talk what U know!; January 02, 2009 8:54 AM
Anonymous said...: Ho Yew Kee claims "never my intention to side the government or town council".
Yet he totally ignores the main points repeatedly mentioned by TKL.

Either
a) TC had been misled and ought to now take action against the distributor or advisors
Or
b) TC knowingly invest residents money into high risk product even though the return is not commensurate with the risk involved, they dont care because it is not their money.

By ignoring the main points, it is clear to everyone Ho Yew Kee is on which side of the camp.; January 02, 2009 9:06 AM
Anonymous said...: Dear Mr Ho Yew Kee,

In replying your questions:
a. What would we have done if we are to invest the reserves of the TC then?
b. What do we do now with the reserve given the fact that fixed deposit rate is close to zero ..?

MY ANSWER is clear that TC should NOT invest in structured notes type of products.

[1] RISKY PRODUCT: It is a very risky product. RISK is a function of market condition and structure. Structured Notes are sitting on UNSAFE structure.

[2] STEWARDSHIP: Principal protection is more important than return because being TC RESERVE means it is reserved for future use for the benefits of residents. Residents expect the TC committee to be STEWARDS and not FUND MANAGER. I think the role must be clear.

[3] UNDERSTAND THE PRODUCT: It is a complex product. I think the management committee of TC will have problem understand the product, and it would be even more difficult explaining it to residents.

You said: "Serving in the TC becomes a catch22 situation...?" I propose you look into the committee responsibility from a STEWARDSHIP perspective, instead of a FUND MANAGER perspective; then you will feel more comfortable to PROTECT CAPITAL even when the return is lower.

I hope to have cleared the confusion caused by your letter.

From CASHEW NUT; January 02, 2009 11:30 AM
Anonymous said...: I am a commoner with no book knowledge of economics. What would I do if I were to have a say in town council investments. There is (say)$150 million as reserve fund which need not be drawn for the next 2-3 years. I would suggest take out some 70-100 million and buy S'pore blue chips stocks like SIA, SPH, Singtel and the 3(?) local banks. The recent turmoil would have wiped off some 40-50% of the stocks value. But still you have them and when the upside comes you are going to get back the money, may be even with a small windfall. But what has happened to TCs (who took the higest risk) now is that they have lost everything. Certainly the management has to explain how they allowed this to happen. Or have I missed out something??; January 02, 2009 6:53 PM
Anonymous said...: Dear Kin Lian,

You said "The Town Council should not just let the matter passed." The heart of the matter is that we do not know what the TC is doing and maybe it is too pre-mature to judge them for their inactivity.

I am sure in your years of senior management experience that if when there does not seem to be much action happening overtly, it does not mean that nothing is happening in the background. The issue is always about timing, appropriateness and what is the best communication mode and device. Maybe, we can give TC the benefits of doubts and wait for their responses. Sure we can remind them but I think they get the message loud and clear and this is the first time we have such "national investment disaster" at the TC level.

I am sure it is to everyone's interest that we hope to recover sometime from this very unfortunate incident.

Yew Kee; January 02, 2009 10:34 PM
Anonymous said...: Hi All,

So much talks on TC's investment failure?
What for?Can anyone for a good course teach TC what to do instead?These group of people who run the TC for so many years and serve the peoples should deserved some credits too.Who can remove them from the organisation,you tell me?
What is important now is we should ask them to be transparent in their daily function and don't spend unnecessary monies.
Move on from here and present good results for all to see in year 2009 and beyond.Finally,TC must assure us that no price hikes on conservative charges.

Ice cream man; January 02, 2009 11:26 PM
Tan Kin Lian said...: Dear Yew Kee,

It is difficult for me to accept a statement "we will find the right time to make the announcement". It does not mean anything. I have seen such statements before - and nothing happens. It is just a way to let the matter die.

In a transparent society, a statement can be made to indicate what action will be taken. Right now, the public does not know if the people in charge have decided on whether there were mis-informed and if they wished to take any action.

We need a more transparent society. We need people in charge who can take decision, instead of depending on people "at the top" deciding for them on "right timing, right circumstances".

Decisions should be taken on what is right, and not what is "politically expedient".; January 03, 2009 3:00 AM
Anonymous said...: What people are crying for is transparency and accountability. Have this and you lose few millions on account of honest judgemental error, people can stomach. To say we made 50 million in the past and we have lost only 30 of that is cocky and insensitive. What the financial meltdown has done is to reveal the unknown nature of fund handling of massive public money here. High time we have the Freedom of Infformation Act(??); January 03, 2009 9:00 AM
Anonymous said...: "...Guess, there are two possible tests (where one is impossible to perform now):

a. What would we have done if we are to invest the reserves of the TC then? (Context: inflation runs at 4% to 6.5%). Hindsight is 20/20.

b. What do we do now with the reserve given the fact that fixed deposit rate is close to zero and there may be good opportunities for cherry picking but we may also lose our shirts? What would we do if we are to serve in the TC now in the context of this furore?..."

?????
Inflation runs at 4% to 6.5% so go for Credit-linked Notes which offer 4% to 6.5%?
Thot Oman have answered U - 5% coupon rate is attached with high risk.
Certainly, Oman didn't know his professional manager took that risk when he said that?

FD vs CLN.
FD,U will always have your principal back and this 'principal' is the people's 'sinking fund'. Please try to understand what is 'sinking fund'.
CLN,if you go in with your 'open eye' professional finance/fund manager we know that U are taking a gamble of losing both principal & interest payment.
If the Professionals are also misled and subsequently exposed to the public, apparently the public will want to know the actions to be taken.
Please be aware that the loss was not disclosed until it was exposed.; January 03, 2009 10:50 AM
Anonymous said...: My gut feel is that the TCs' loss in Minibonds is only a tip of the iceberg. If TCs are fully invested at 35% of the sinking funds totalling $2 billion, and just assuming 50% of that is invested in equities, that will add up to $350 million. The stock market lost about 50% in market value in 2008. It is therefore highly possible that the TCs are sitting on a devaluation of over $100 million in equities. Is that's the real reason why TCs are so shy to disclose their investment conditions? Sinking funds are raised and earmarked for estate management purposes. Can they and should they be exposed to significant risks at all. HDB residents don't get to share the gains but they will be charged more if losses become substantial, real and realised. Isn't it unthinkable like for one's mother losing her household food allowance in TOTO or 4D?; January 03, 2009 1:42 PM
Anonymous said...: So sad to hear that if TC had actually invested so much in these failed investments.
I would cross my fingers and hope that the lost was according to newspapers had reported...
My concerned is " Is the major TC's Fund is still intact.Can anyone enlighten us?"
Thanks,

Ice-cream man; January 03, 2009 6:10 PM
Anonymous said...: I am a concerned Singaporean in my 20s. If the Town Councils do not do what is Right by questioning the banks, then something is very wrong. It just goes to show that they didn't read the fine print and proceed to invest with the possibility of losing All the principal amount. UK and Hong Kong are now investigating the banks but our Singapore government is not investigating the banks. It smells fishy. Most probably, I might not vote for them in the next election if this matter is not managed properly. I am really angry with the DBS bank. My mum invested in the structured deposit but she thought it is fixed deposit. Luckily it is not Lehman brother. I thought it is better off putting in the saving account, at least she earn a few dollars of interest.; January 03, 2009 11:51 PM
Concerned said...: All Town Councils should make an annual report to all the residents and not make statements like our annual reports are available at our website, etc. The annual reports should show fees collected, annual operating and capital expenditure, surplus or deficit together with the accumulated reserves and the sinking fund. Surely, if town councils can expend millions in those minibonds, why can't they spend some money printing those reports and let the residents see for themselves whether the money collected are well spent. If private estates can practice such procedures, surely TC can do so. Imagine if any of the private estate were to lose a proportion of such money, there would be a big outcry and those in the management committee would be booted out already.; January 04, 2009 12:44 AM
Jeremy said...: Hi Prof Ho

I also sent in a letter to ST Forum with regards to the TCs' investments, but it was not published. However, seeing that you are here, I would like to hear your response to the points that I raised in my original letter:

1) TC funds should be mainly for short-term needs. Future funding needs (e.g., major refurbishment exercises) should be satisfied via future collections, and only on an ad-hoc basis where the need has been identified. TCs thus avoid accumulating reserves and this eliminates the need to actively manage the reserves. It also avoids the current unfair practice of charging existing residents for future projects that they may not be around to enjoy.

2) TCs need to recognise that their priorities are in delivering cost-effective solutions to maintain the housing estates' facilities and equipments. Having large reserves require additional resources to manage these reserves effectively and inevitably diverts attention from TCs' original priorities. Accumulation of large reserves in TCs' funds should be avoided henceforth.

My actual email can be viewed on my website: http://iinvestthereforeiam.blogspot.com/

Regards

Jeremy; January 04, 2009 2:04 AM
Anonymous said...: When the management of an organisation does not take a stand and be decisive it usually mean one thing. They are subservient and not talent in its own right. This usually happens in family run businesses and that is why there is a huge difference between the performance of family run businesses and professionally run businesses. Professional managers and leaders do what is right for the organisation they serve while managers in family run businesses look at what the head of the family thinks and do accordingly. Over time, family run businesses disappear because they are not founded on talent but relationship. In other words, they did not get the best person for the job.; January 04, 2009 1:55 PM
Anonymous said...: Democracy had die. So too are accoutability and transparency. What prevail are selfish motivation and self-centredness. It's time to change. Change we need. America has changed, what about S'pore?; January 04, 2009 6:12 PM
Unknown said...: Democracy has never died. Neither had Transparency and Righteousness.

Because They has NEVER lived. Again this is a Fact.; January 06, 2009 10:35 AM
Anonymous said...: Yes, our Town Councils should step forward & state clearly what are their stand on the investments in the failed Minibonds - are they misled & if so, are they suing; have they made a genuine mistake, if so, they are eating humble pie & not taking any action vis-a-vis the intention of over 200 individual investors who are taking the legal route. As regards the impact of volunterism in TCs'work, the volunteers should stay focus if they have acted professionally, with the utmost integrity & interests of the resident!!!; January 06, 2009 12:45 PM
Anonymous said...: Unbelievably, town council hasn't done anything so far to mitigate their investment failure. Shouldn't they at least be responsible to recover the losses. How can we trust such irresponsible people with our blood and sweat money?; January 06, 2009 11:35 PM
Anonymous said...: If "someone" can get away with the escape of MSK, I don't see why TC needs to explain on its "failed investment".

TC can invest in whatever it wants and end of the day, we as the taxpayers, residents and voters have to blame ourselves for having too few "alternative" parties in the parliament to question the PAP Gov why TC invested in "mis-selling" products?

May be it's another "honest mistake", so let's move on!; June 20, 2009 9:44 AM

Friday, January 02, 2009

Reply to Ho Yew Kee

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