Saturday, September 20, 2008

Biggest gamble in history - Credit default swaps,8599,1723152,00.html

Size of market
Credit default swap - USD 45 trillion
Stock market - USD 22 trillion
Housing market (mortgages) - USD 7 trillion
US Treasuries - USD 4 trillion

Singapore banks and short selling

Dear Mr. Tan,
I always thought that putting my lifetime savings in a bank to earn interest is safe. The recent crisis in US and news about Lehman Bros and AIG is disturbing. I begin to wonder how safe is our Singapore banks and which of the three banks is the safest of all? Why are we protected only on $20,000 on each account?

The Straits Times article about the Minibond series 3 is enlightening. I was offered this product which was sold as a bond. I stayed clear because I had a bad experience of structured deposit sold by bank. What worries me is that the bank and financial adviser also claimed that they were also mislead.

Retail customers transact with a bank based on trust that they are reliable and expert in financial product. Can anyone enlighten me what is the role and ethic of the bank?

In US, the government has banned short selling in their stock market to salvage the crisis. The relevant authorities acknowledge the negative effect of short selling. In Singapore short selling is allowed too.

The financial adviser told me that buying equities is about investment. The unfolding of the recent event in US and our stock market make me think otherwise. Buying equities is not an investment when short selling is involved. SGX has tried to take measures by allowing short sell on borrowed shares. Short-sell will make the price go up or down. Can thus be considered as genuine market force of supply and demand?

Let me try to visualise the Lehman scenario as a layman. For example, there are 1 million genuine Lehman share, but because of short selling, 10 million Lehman share were artificially created in the stock market and sold down. I hope in the near future all forms of short selling should be banned from sensitive equities, such as financial, banking and insurance equities.

I would appreciate if you can comments how safe and resilent is our local bank to the recent unfolding crisis in US.

I think that the Singapore banks are quite safe. Even in America, the large banks dealing with the public are quite safe. They are monitored by the Fed.

The banks that got into trouble are the investment banks, which were highly leveraged and not controlled by the Fed.

Credit Default Swaps (CDS)

AIG lost a few tens of billions in Credit Default Swaps. Here is an explanation in Wikipedia.

A credit default swap (CDS) is a contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default or "credit event" in respect of a third party or "reference entity".

If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").

A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.

Call to MAS to take pro-active action

Two months ago, the New York State Attorney took action against several financial institutions for marketing the "auction rate securities" to retail investors on the representation that they are liquid investments and can be redeemed at any time. The financial institions had to buy back these securities at no loss to the investors.

I hope that the Monetary Authority of Singapore or the Attorney General can take similar action on behalf of retail investors who had been misled into investing in the Mini-Bonds and similar structured products by their bank's relationship managers in the belief that these investments are safe.

It is time to hold the financial institutions accountable for their mis-selling activities and for our regulators to be pro-active.

Minibond Series 6

This blog was first posted on 16 July 2007

Dear Mr Tan
My risk-adverse retired father has always placed his funds in fixed deposits as they are risk-free.

I saw the advertisement in today's papers for the minibonds series 6 which pays 5.1% for 5 3/4 yrs.

These bonds seem to be relatively low risk and the returns appears good. Is there any catch? I'm considering asking my dad to transfer his funds to buy this since his fixed deposit is maturing. Can you advise?



The Minibond series 6 pays 5.1% p.a. for 5 3/4 years. This payment comes from the principal invested in the fund, and is NOT the same as the actual return earned on the fund.

Here are the information obtained from the advertisement.

1. The fund is invested in credit-linked securities that are rated AA at the time of issue. These credit-linked securities have a high risk than bonds with the same rating.

2. The Notes are not principal guaranteed or principal protected. There is a likelihood that the investor may not get 100% of your principal on the maturity date. This is likely to happen, as the fund pays out more than what it earns and has to incur heavy expenses (not disclosed) for distributing and managing the fund.

3. If there is a Credit Event happening to any of the 6 financial institution before the maturity date, the investor may lose part or substantially all of the invested amount.

You need to read the prospectus carefully to understand the definition of the Credit Event and the likely amount that can be lost. (I believe that this is difficult to assess, even for an expert like me).

4. There is a provision for the Issuer to redeem the Notes earlier, on or after 3 years from the Issue Date. This right is likely to be exercised, if interest rate has fallen. The investor will have to re-invest the money to earn a lower interest rate.

5. You are advised to read the prospectus and understand the investment risks and the terms. If you do not, you cannot complain later if the investment turn out to be bad.

My views: Do not invest in this product, as it has much uncertainty and the return is not attractive. It is better to invest in a government bond to earn about 3.5% per annum over the next 5 years.

You can read the following:

Structured Products - how they work
Avoid Structured Products
Ask Mr Tan

Pinnacle Notes and MiniBonds

This blog was first posted on 16 July 2007


Maybe you like to comment on the Minibonds and Pinnacles. Both recieved overwhelming response from the public. What I know they are products designed for people who want streams of income. The tenor is 3-5 years with step up options with higher returns.
Since they are well received they must be good. Investors don't throw away $150 mil. for each tranche for nothing. There had been quite a few tranches already.



Can you give specific examples of the earlier series of the Minibonds and Pinnacle Notes. What price are they trading now? How well have they performed? Did they provide a good return to the investors?

I have highlighted some of the current features of these products. They contain an element of speculation and carry a risk that has not been properly assessed.

Avoid complicated products

This blog was first posted on 17 July 2007

I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.

To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.

After spending this time, the investor will still have more questions. There are still so much uncertainty.

If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.

For example, they will tell you that the risk of a credit event is small, that your investment is safe.

Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.

What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".

I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.

Lesson: Do not invest in complicated products, that you cannot understand.

If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).

Foreign currency exchange rates

Do not trust your bank to give you a fair exchange rate. They don't. They like to increase their profits, and that is done by charging a high spread on their customers.

If you change from foreign currency X to foreign currency Y, the bank changes your money from X to SGD and from SGD to Y. At each change, they charge a spread of about 1%. You have to pay a spread of 2% for changing from X to Y. This is too high. If you do not ask, the bank does not tell you how it is done. It applies the two spread automatically and send a statement to you. When you realise it, it is too late.

In the past, I trust my bank. Now, I don't. I always ask my bank to quote the exchange rate or interest rate to me. With the quoted rate, I can compare with the rates charged by other banks. My bank automatically gives me a competitive rate, as they are afraid when I move my business to another bank. Later, they will lose me as a customer.

You should always your bank to quote the rate to you. The relationship manager will give you the "excuse" that the rate changes every minute. This is partly true. But the real reason is that, if you do not ask, they can charge you a large spread and you will not realise it.

I hope that the Consumer Association or Monetary Authority of Singapore get the bank to adopt a code of practice that is transparent and fair to consumers.

Pinnacle Notes

Hi Mr. Tan,
I invested in Pinnacle notes series 6. The arranger is Morgan Stanley and the 6 reference entity are Bank of America, Citigroup Inc, DBS, Singtel, OCBC and UOB.

Should I continue to hold on to the notes or cash out? If I cash out now, I will get only 34.07% of our total principal. I know that the health of Morgan Stanley is crucial to the survival of this Note. With so much uncertainty in the market, is it better to take a loss now?

In my view, and it is just my guess, Morgan Stanley will not face the same fate as Lehman Brothers. The six reference entitles appear to be all right. The rescue package being arranged by the Fed and Treasury in USA is likely to prevent other big failures. It is not worth while to sell the Pinnacle Notes at a loss of 65% at this time.

Mini-bonds - ask MAS to investigate

Hi Mr. Tan,
Last year due to some unfortunate series of events, my parents and I decided to invest in the minibonds, which is already gone as Lehman Brother is undergoing liquidation. It is very sad, but we have to accept the loss.

It is unfortunate that Lehman Brothers went into bankrupcy, triggering a credit event. If they had been rescued like AIG, the credit event could have been avoided.

You should write to ask MAS to investigate what happen to the mini-bonds. Although a credit event has been triggered, you should ask what really happened to the money. Who took the money when a credit event is triggered?

It seems that many investors lost their money, and someone must have made a big gain. I undersand that the money raised from the mini-bonds are actually invested in other assets and are not invested in Lehman Brothers. So, somebody must have made a big gain at the expense of the small investors.

Please ask MAS to investigate this structure on behalf of the small investors.

Friday, September 19, 2008

DBS High Notes

Dear Mr Tan,
You were always very critical on structure products from Bank.
And you are right!
Thanks for the previous posts on such structure products.

Sep 18, 2008, The Straits Times
DBS High Notes investors at risk
Bank warns they may lose entire stake in Lehman-linked product
By Francis Chan

SOME local investors of a product linked to bankrupt investment giant Lehman Brothers have received late-night phone calls from DBS Bank warning them that their entire stake may be wiped out. The investors have their cash in a product called DBS High Notes 5 that the bank offered wealthier clients last year. It came with a promised annual return of about 5 per cent.

But Lehman's collapse on Monday means the product will be unwound and investors may only get a portion of their investment back - or none at all.


Thank you for sending this news article to me. I am now in Jakarta and was not aware about this event. It is so sad that many people have lost their money in this "credit event".

Perhaps the small investors who lost their savings should ask MAS to look into the structure of this product, and why should the "credit event" cause a lose of their entire savings? Where did the money go?

FAQ on Structured Investment Products

True cost of life insurance

Does a life insurance policy provide good value for a person to plan for the future?

Fake Money

Hi, Mr. Tan,

I have been taking about fake money very often in your blog, but I suspect not many people understand me..

Below is a link to an instructive cartoon about the fractional reserve banking system

> how it creates money out of thin air
> how it skews the wealth distribution, making the bankers richer and richer over time
> why this system is a ponzi scheme and will eventually collapse

After watching the video, people should realise nearly all money is actually fake, created out of debt.. and we will need more and more fake money to keep the economy going (exactly like a ponzi scheme)..

When the amount of debt gets too big and balks at creating more fake money, the system will collapse and cause a severe recession/depression.

I believe we are really close to this point of collapse now.... and we should welcome the collapse and take the chance to adopt a different banking system, one where is sustainable and money not controlled by bankers/central bankers.. one such system is a free banking system proposed by most Austrian economists.. but which government is willing to give up the power to create money?


Thursday, September 18, 2008

Poor conversion rate for Foreign Currency

Dear Mr.Tan,
I gave instructions that on maturity of my FD to convert GBP to NZ$. I got a poor exchange rate. I checked the conversion on the Internet and, in my opinion, a fair value is 2.3% higher.

I made numerous calls to the bank to ask how their rate was derived. They have not replied to me. As guideline. I understand that direct conversion GBP to NZ$ will give a higher figure than converting GBP to SGD and then changing to NZD.

So I want to get redress from MAS. Who shall I address to?


Read these pages:

You probably have to take the following steps:

1. Write to CEO of the bank
2. File a complaint with FiDREC.
3. At last stage, approach MAS

Double standards

During the Asian Financial Crisis in 1998, the currency and stock markets in South East Asia dropped sharply. It was caused by short selling and aggravated by the accounting rule of "mark to market". The hedge funds made a lot of money by pressing down the markets. The global fund managers said that the weaknesses were due to "lack of transparency" and other factors.

This time, the financial crisis originated from the markets in USA. To address these problems, the following actions are being taken:

> restrict short selling
> use of Government funds to support the market

The following measures are being considered:
> suspend "mark to market"
> suspend the credit rating

These measures were frowned up during the Asian Financial crisis. Now they are being considered. This is a world of double standards.

How far more for the ST Index to fall?

Someone asked me, "What is the lowest point that the ST Index can go down to?"

I do not know the answer. I don't think that anybody knows. But I can make a guess. And I wish to caution that this is just an opinion.

Here are the high and low points of the ST Index during the past two crisis.

Asian Financial Crisis - 1998: drop from high of 2,400 to low of 800
Corporate scandals - 2002: drop from high of 2,400 to low of 1,200

I consider the "fair value" of ST Index in 1998 to be 1,600 (mid-way between the high and low) and in 2002 to be 2,000. Projecting from these two fair values, I regard the fair value of ST Index in 2008 to be 2,700.

During a crisis, the market can drop to 1/2 or 1/3 of its peak. Taking the peak before the current crisis to be 3,800, I think that the ST Index can drop all the way down to 1,900.

However, if you wish to invest, you should not wait for it go all the way down to 1,900. It is all right to start investing now, and to add on (i.e. average it) down to 1,900. In case it does not reach this level (and the market recovers), you will have made some investments. As you are investing below the "fair value", it is all right to hold on to the investments, even if it falls further. The market will eventually recover.

Beware of Scams

Read this article and comemnts from readers in

On My Own

This is another of my favorite songs from Les Miserables.

Wednesday, September 17, 2008

Eligibility for an Eldershield claim

Disability shall mean the inability of the Policyholder to perform at least 3 of the following Activities of Daily Living, even with the aid of special equipment, and always to require the physical assistance of another person throughout the entire activity.

Washing : The ability to wash in the bath or shower (including getting into and out of the bath or shower) or wash by other means.

Dressing : The ability to put on, take off, secure and unfasten all garments and, as appropriate, any braces, artificial limbs or other surgical or medical appliances.

Feeding : The ability to feed oneself food after it has been prepared and made available.

Toileting : The ability to use the lavatory or manage bowel and bladder function through the use of protective undergarments or surgical appliances if appropriate.

Mobility : The ability to move indoors from room to room on level surfaces.

Transferring : The ability to move from a bed to an upright chair or wheelchair, and vice versa.

Definition of Pre-existing Disability

Pre-existing Disability are excluded, i.e. suffering from the Disability as defined above before your ElderShield Policy's commencement date. For persons who are auto-covered, disability caused solely by accidents that occur during the 90-day opt-out period shall not be regarded as Pre-existing Disability.

Eldershield - is it worth insuring?

Dear Mr Tan,
I have just received a letter asking me to subscribe for Eldershield. Can I know is it worthwhile to subscribe to it or not. I am covered with enhanced Incomeshield, term insurance, accident and critical illness plan.

It depends on the cost and benefit of the Eldershield plan.

I suggest that you take the annual premium and accumulate it at interest rate of 4% per annum (which is what you now earn on your special account).

The chance of making a claim before age 75 is quite low. The chance of making a claim after 75 is probably between 30% to 50% (which is just my guess).

Perhaps, you can see if it make sense to insure, or carry the risk on your own.

Do you need life insurance for the whole of life?

Do you need life insurance for the whole of life?

Tuesday, September 16, 2008

Eldershield - benchmark figures

A male at 40 pays $175 for 25 years for the lifetime coverage of Eldershield. If this person opts out of Eldershield and keeps the money in CPF special account to earn 4% a year, the premium will accumulate to $11,220 at age 75.

The chance of making an Eldershield claim before age 75 is quite small, maybe less than 5%. The chance of making a claim after 75 is perhaps less than 30% (but it may increase in the future).

Eldershield pays $400 a month for up to 72 months. However, most people who make the claim do not live for 72 months. I guess that the average payout could be (say) 48 months. This gives $19,200.

If the chance of making a claim is 30%, the average payout is $5,760. This represents a claim ratio of 51%. This claim ratio is quite fair.

However, if the chance of making a claim during the lifetime is less than 30%, then it is better to self-insure, rather than buy Eldershield.

A female pays a premium of $218. This is 25% higher than for a male. The chance of a female making an Eldershield claim is higher than for a male.

I do not have the latest figures on the claim rate. Perhaps, the Ministry of Health may release this figure in the future?

Term insurance - is the premium proportional?

Dear Mr. Tan,
Thank you so much for putting so much useful information on your website. I almost bought a whole life insurance policy from my financial planner--but luckily thanks to finding your site I realized that it doesn't really make sense to do so. I'm in the process of reading every article in your website.

I have a question about the following page on your website:

In it you stated that the annual premium for $100 000, 30-year old male, covered for 30 years, are $305 for level, and $115 for decreasing.

My question is: how linear is this guideline? Does it mean that to get if the sum is $200 000, the premium should be $610 and $230, respectively? Does it get cheaper if the sum assured is more than 1 million? Also, what if I want the coverage to last 35 years (until I'm 67), instead of 30 years?

Thank you very much in advance, and thanks again for your blog and your website.

Usually, the premium rate is in straight proportion to the sum assured. However, it depends on the practice of each insurance company. It is best to ask a few insurance companies to quote you the rates for various sum assured.

Here are some companies that you can call

Monday, September 15, 2008

Do you hear the people sing

This is my favorite song from Les Miserables. It was during a time when the poor people of France were oppressed, and they wanted a new life. Maybe, this reflects our current times?

Is your money safe with AIA ?

Several AIA policyholders have asked my advice. They are worried that AIA may be affected by the collapse of AIG. They asked if they should surrender their AIA policy now and receive the surrender value now.

My advice is:

> AIA has a separate policyholder's fund covering its liability to its policyholders in Singapore.
> To my knowledge, this fund is solvent and is not affected by the problem faced by AIG
> There is no need to panic and surrender the AIA policies at this time
> Even if this fund is in trouble, there is a Policyholder's Guarantee Fund managed by MAS that can take care of most of the liability (maybe 90% or more).
> It is better to wait for any official announcement from MAS

I hope that my comments are correct and can help to allay the fears of AIA policyholders.

Guaranteed drawdown pension

Hi Mr. Tan,

What are your views about this type of pension? If a UK insurance company can offer something like this, surely the Singapore government can offer something like this on annuities for post 62ers? Or least something better than what we will get.


I promoted the concept of pension drawdown with an investment fund (i.e. equity, bond or mixed fund). The idea is that you invest your savings in the investment fund, earn a market yield (which can fluctuate wildly) and draw down each month what you need. Any balance in the fund on death of the investor is paid to the estate.

You can calculate the monthly drawdown to last until you are (say) 120 years old. As most people will not live to that age, there will always be some balance that is available.

If you are investing for many years, you reduce the risk of the investment fund as you will get some good years and some bad years, which will give an average yield over the period.

The UK product works in a similar way. It has an added feature to provide the guarantee. I usually advice people to avoid buying this type of guarantee, for the following reasons:

> it is costly
> it is not transparent
> the financial institution backing the guarantee can go bust (like what is happening to the credit default swaps,etc)

Take risk. Risk is to your advantage. Stay with the transparent products. Avoid structured products (like this type of guarantees),-

Sunday, September 14, 2008

Distress over an investment linked policy

A reader asked for my advice on the following:

> He invested heavily in an investment-linked policy. He made many fund switches in past years.

> Recently, he asked to make a partial surrender. The company held back the payment of the surrender amount, to investigate his fund switches. The payment was not made after more than one month.

> The company did not specify in writing the reason for the delay and the nature of the investigation. The customer called the company, but was given verbal promises that were not kept.

>The customer also asked to switch from the equity fund to the money market fund. This was not executed. The customer went to the company the following day and submitted a new request. This company did not execute the switch. The company wrote a week later to state that the switching has been suspended due to irregularites. They did not specify the nature of the irregularities. The equity fund dropped by 30% over the next two weeks, causing great loss to the customer.

I advised the customer to lodge a complaint with MAS on the dreadful conduct of the insurance company. If this is not resolved, the customer should take up a legal case against the company for the losses that they have caused to him.

Specific Unfair practices

Schedule 2 of the Consumer Protection (Fair Trading Act) lists down 20 specific unfair practices. They are listed here:

Those relevant to financial products are:

7. Representing that a price benefit or advantage exists respecting goods or services where the price benefit or advantage does not exist.

11. Taking advantage of a consumer by including in an agreement terms or conditions that are harsh, oppressive or excessively one-sided so as to be unconscionable.

12. Taking advantage of a consumer by exerting undue pressure or undue influence on the consumer to enter into a transaction involving goods or services.

14. Making a representation that appears in an objective form such as an editorial, documentary or scientific report when the representation is primarily made to sell goods or services, unless the representation states that it is an advertisement or a promotion.

20. Using small print to conceal a material fact from the consumer or to mislead a consumer as to a material fact, in connection with the supply of goods or services.

Consumer Protection (Fair Trading) Act

Financial products are now governed by the Consumer Protection (Fair Trading) Act.

More details here:

Read this FAQ:

1. What constitutes an unfair practice under the Act?

It is an unfair practice for a trader, in relation to a consumer transaction-

> to do or say anything, or omit to do or say anything, if as a result a consumer might reasonably be deceived or misled;

> to make a false claim;

> to take advantage of a consumer if the trader knows or ought reasonably to know that the consumer
++ is not in a position to protect his own interests; or
++ is not reasonably able to understand the character, nature, language or effect of the transaction or any matter related to the transaction; or

> to do any of the 20 unfair practices listed in the Second Schedule of the Act.

The trader should provide the consumer with all relevant and material information so as not to mislead the consumer. The consumer can then make an informed decision. Traders should review their business practices; in particular, what information they provide to consumers and how they convey information.The court, in determining whether or not a trader has engaged in an unfair practice, would consider the reasonableness of the actions of the trader. The court would also take into account, in granting remedies to the consumer, whether the consumer tried to resolve the dispute with the trader first before commencing action.

My comment: Many of the complicated financial products offered in the market will not pass this test of "fair trading".

Are Consumer Protection Initiatives Meeting Expectations

This paper gives an interesting explanation of the approach adopted in Canada, UK and Australia:

It explains the approach taken in Singapore as follows:

In the case of Singapore, financial services (excluding money lending and pawn broking) have now been brought within the ambit of the Consumer Protection (Fair Trade) Act of 2004. Consumers now have the option to pursue remedies under the Act for unfair practices and unconscionable conduct (such as high-pressure selling) by financial institutions. Dispute resolution is delegated to the Financial Industries Disputes Resolution Centre Ltd although only cases of up to S$50,000 will be heard. Interestingly, in 2004 the President of the Consumer Association of Singapore, who is also a Member of Parliament, raised the issues of high pressure sales tactics, the high rates of interest charged on credit card balances and the ‘cartel-like manner’ in which banks maintained interest rates of 24 per cent when other financial borrowings incurred interest of less than 5 per cent.

The Second Minister of Finance responded by saying that the Monetary Authority of Singapore does not consider its role to include directly settling commercial disputes between financial institutions and their customers. The Authority also does not interfere in the setting of interest rates and prices or what terms and conditions should govern commercial transactions. Rather, he Authority provides the regulatory framework for the necessary disclosure and the proper business conduct standards to be undertaken so as to ensure that the consumer is fairly treated.

In the light of the above, how might one evaluate Bill Knight’s conclusion that “the importance of
the consumer to a vibrant and healthy economy has moved non-prudential/market conduct regulation to a place at the table beside prudential regulators in the financial services regulatory structures around the world”? This might be true of OECD countries generally but significant developments in other parts of the world seem less apparent. Could one possibly envisage conditions where governments “move forward to adjust regulatory structures (and) pay close attention to the consumer and their needs”? Consumers are unable to generate any degree of countervailing weight while governments still seem be too protective of, and too hesitant to ‘fetter’ their financial institutions, to do anything dramatic in this direction. One may not be far wrong to say that most countries are, to some degree or other, behind the best-practice curve and perhaps Asian countries are further behind than where they ought to be.

The key message from this paper is quoted in the last line, "most countries are, to some degree or other, behind the best-practice curve and perhaps Asian countries are further behind than where they ought to be."

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