It is easy to be cheated (11) - Life policy with annual cash payment

In recent years, many life insurance companies have introduced a life policy with annual recurring payment. The agents sold this product actively and earned high commisison. The policy gives a very low yield to the policyholder. and is worse than an endowment policy. It is easy for the agent to sell the attraction of the annual cash payment to a consumer who is not aware that that he or she is actually taking back a part of the premium.

A endowment policy already gives a poor yield, due to the high charges. The guaranteed return is about 2% per annum and the non-guaranteed bonus may add another 1% or 2% to the yield.

The insurance company design the annual cash payment by increasing the premium rate on the underlhying whole life or endowment policy and use the increased premium, less expenses, to make the cash payment to the policy.

Take this example. The endowment policy requires an annual premium of (say) $3,000. To make the annual cash payment, the insurance company increases the premium by (say) $1.000 and makes a cash payment of $900 to the policyholder from the second year. There is no payment for the first year, as the additonal premium is used to pay commission to the agent.

Why should a policyholder take a polcy that requires an additional premuim of $1,000 and pays back only $900 a year.? Surely, it is more sensible for the policyholder to keep the $1,000 in the bank account, rather than give it to the insurance company and receive back only $900?

This type of policy does not make sense to the policyholder, but the insurance agent loves to sell it, as they can earn additional commission on the additional premium.

The yield on this type of policy is lower than for an endowment policy. It could reduce the yield (which is already low) by another 1%. I undersand that most of these type of annul cash payment policy gives a guaranteed yield of only 1%.

The insurance agent is highly trained to sell this type of product to the customer, even though it gives a poor yield. Many of the customers are not aware about the true nature of the product and can be easily taken for a ride. How sad!

Tan Kin Lian

High Executive Pay

Remuneration committees of the board of directors approve high pay for CEOs on the reasoning that it is needed to attract other top talents to join the organisation. 

To justify the high pay, the CEOs and top managers have to improve the profits, i.e. to "increase sharehholder value". This has led to a culture of excessive risk taking and taking advantage of  customers. This is the reason for the bad business ethics that was seen in recent years.

Singapore has gone into this bad phase, which has led to a serious loss of trust in business and government institutions. I hope that corrective steps are now taken to improve the business ethics and enviornment in Singapore.

Tan Kin Lian

TKL Intelligence Quz

If you wish to buy Vol 1 or Vol 2 of the TKL Intelligence Quiz, you can place your order here. Free delivery to your home in Singapore. Pay by bank transfer or PayPal.

Executive rewards for what?

Here an honest view from the CEO of Shell.

Cut in maturity benefit just before maturity

Mr Tan,

I have a policy with X where I paid premium for 12 years which will mature in July. On  31 March 2009, upon my request I was given at estimated maturity sum. On April 24, I received a letter stating a maturity sum which differed by almost 10% lower.

I have emailed and spoken to X but without making much headway. Can an insurance company provide you with an estimate barely 3 months before maturity and then slashed it down by such a large sum?

I have emailed MAS and am thinking of approaching FIDREC. I would appreciate advice from you.

REPLY
X owes you a satisfactory explanation for the lower maturity sum. Between 31 March and now, the investment market had improved considerably. If there is any change, the maturity value should have been higher.

You can lodge a complaint with FIDREC. It will cost you only $50. If you wish to strengthen your case, you can consider asking CASE for help as well.

Is Animal Farm relevant to Singapore?

Read this article.

It is easy to be cheated (10) - Orphan money

A life insurance company is allowed to distribute only 10% of the surplus of the participating fund to its sharehohlders. The remaining 90% of its surplus has to be distributed to participating policyholders. 

In past years, most insurance companies distribute nearly all of the 90% to its policyholders in the form of annual bonuses. In recent years, more insurance companies have started to keep a large porportion of the surplus in the fund, without distributing them as annual bonuses. Some companies have reduced their annual bonus by 50% or more. They promised that the undistributed surplus will be paid as terminal bonus when the policy matures or is terminated.

Many insurance companies have accumulated a large amount of the undistirbuted surplus. This is called orphan money. Each policyholder has involuntarily contributed to this orphan money, but the amount contributed by each policyholder is not identified. This retention is made without the agreement of the policyholders and against their wishes. Most of them preferred the surplus to be declared as an annual bonus.

It is easy for the insurance company to use the orphan money in many ways that do not benefit the policyholders that had involuntarily contributed to it. They can be used to pay high commission to increase the sale of new policies (which do not benefit the old policyholders), or to pay high salaries and commissions.

When the policies mature or are terminated, the amount of terminal bonus given to the policyholder is likely to be much lower than they are entitled to, based on their actual contribution in past years. There is no way for the policyholder to find out if they have been fairly treated. There is lack of transparency and accountability. The insurance company can declare that they have been fair in distributing the bonsues, but there is no way for this statement to be verified. The policyholder has no say in this matter.

Is this fair? Are the policyholders being cheated? Can you trust the future management to be fair?

As many financial institutions have acted unfairly in recent years, it is better not to trust them. Do not invest in the financial products that give a lot of discretion to the financial institution and insufficent rights to protect the consumer.

Tan Kin Lian

Logic Quiz 5-2 (Vol 4)

There are five houses with different colours in a row. Each occupant plays a different sport, keeps a different pet and drinks a different beverage.

 1. The vodka drinker lives in the second house.
 2. The soccer player lives left of the tennis player.
 3. The lawyer lives right of the volleyball player.
 4. The yellow house is left of the red house.
 5. The salesman keeps dalmatian.
 6. The manager lives left of the accountant.
 7. The accountant drinks rum.
 8. The beer drinker lives in the white house.
 9. The schnauzer owner lives left of the collie owner.
10. The martini drinker lives in the red house.
11. The vodka drinker lives in the blue house.
12. The cricket player keeps pomeranian.
13. The doctor lives in the last house.
14. The spaniel owner lives in the brown house.
15. The doctor lives right of the wine drinker.

Question: Who plays golf?

Give your answer here. The correct answer will be displayed when you submit your entry.

Benchmark
1 to 10 mins: very good
10 to 15 min: good
15 to 20 mins: fair
more than 20 mins: need more practice! 

More of the quiz
It appears every Sunday in The New Paper.

You can buy my book at these bookstores: 

President Obama's plans to create new jobs

President Obama's plans to create new jobs is likely to make a better impact than the measures adopted in Singapore (which gives a subsidy to employers who are doing fairly well). Read this article.

It is easy to be cheated (9) - A better way to gamble

I consider investing to be similar to a gamble. The investor buys a financial product and hopes that the price will go up. If the price goes up, the investor makes a profit. If it comes down, the investor makes a loss. The investor has to take the invested asset does not fail and become valueless.

In recent times, it seems that even money kept in fixed deposit in a bank, which pays a low rate of interest, has the risk of default of the bank. Some people think that it is safer to keep the money under the bed!

To make the matter worse, financial institutions have created products that are risky and do not disclose the actual nature of the risk and do not pay a fair rate of return to the investor for the risk!

To avoid risk, it is better to invest in the following:

a) bonds that are issued by the AAA rated government. They offer a low yield, but is fair and safe.

b) A low cost, diversified fund invested in many bonds or shares, such as an indexed fund or exchange traded fund. Invest for the long term, to average out the good and bad years.

For investors who like the excitement of speculating on the price movement of shares or other assets, be honest and recognise that you are actually gambling. If you wish to gamble, it is better to go to a casino. The odds are fairer to the gambler, and the terms of the gamble are controlled by the authorities. You know the odds, and can decide on which side of the gamble to take!

Singapore is opening two world class casinos. When you gamble, make sure that you gamble an amount that you can afford to lose. Enjoy the gamble and good luck

Tan Kin Lian

Writing fee

Many magazines approach people to write articles, but they declined to make any payment or they pay a very low fee. It seems to be a habit in Singapore for people to be asked to write for free. I hope that mgazines are willing to pay writers at a fair rate, so that it is possible for writers to make a living.

I have been asked to contribute articles to magazines. Although I do not need the money, I asked for payment to be made to a non-profit organisation. If they refuse, I decline to write.

Speaking fee

When a conference organiser in Singapore engages a speaker from overseas, they have to pay the travelling expenses and a speaker's fee. When they engage a local speaker, they pay nothing.

Recently, I have been invited to speak on a few occasions, and have declined. I am willing to speak only if they agree to make a modest donation to a non-profit organisation nominated by me.

I wish to encourage conference organisers, and our media companies, to be fair to local speakers and be willing to make a modest contribution. They should not expect local experts to speak for free, while overseas experts command a large fee. We have to be fair to our local people.

Many of these conference organisers or media company make a profit and can afford to make a modest donation or pay a modest fee. It will not create any significant dent in their profits.

It is easy to be cheated (8) - Your private banker

Wealthy people have private bankers. These private banks are welll trained to convince the customer to invest in exotic products that are created by the financial institutions. These products are quite complicated and are not well publicised. It is easy for the unsavvy investor to be conned into investing in products that have high profit and expense margins for the financial institution.

When the investor found out that the product made a big loss, there is nothing that they can do. The private banker will explain that the market has gone against them. But in reality, the products usually would not give a corresponding return when the market goes in their favour, as a large part of the profit would have been taken away by the financial institution.

The private banker may encourage the customer to invest in certain currencies, shares or other assets that are traded in the open market or exchanges. As the prices of these products move every second, it is not easy for the customer to know if they have been given the fair prices. It is possible for the prices to be inflated or deflated, to the detriment of the customer.

The customer has to rely on the honesty of the private banker or the financial institution in giving the correct price. But, in recent years, there is lack of honesty as financial institutions searched for higher profits.

When times are bad, and financial instituions make losses on their own portfolio, it is easy for them to find some way to push these losses to their unsuspecting customers. The customer does not know if the transactions are properly audited.

Many people have lost large sums of money by acting on the recommendations of the private bankers or wealth managers. They are not sure if the losses are just due to the market or to dishonest practices of these intermediaries.

Tan Kin Lian

A positive attitude

View this meaningful powerpoint.

Finding financial advice in an age of bad behaviour

Read this article. It shows that wealth managers and financial advisers cannot be trusted.

It is easy to be cheated (7) - Cashing out your financial product

Many investors bought the credit-linked notes without understanding the nature of the risks. When they found out later, and some of the underlying assets had turned bad, they wanted to cash out and take a loss. 

The only buyer of the product are the product issuers who quoted a very low price for the product. The investor is not able to assess what is the correct price of the product, as they do not have information about the underlying assets and the extent to which they are likely to default. 

The product issuer has the information, but they are acting with a conflict of interest and a monopolistic position. They can quote a price that is much lower than the underlying value and make a big profit.

What can the investor do? It is best to take the risk and ride it out. If the situation become worse, it is bad luck. But, it could turn out to be better. If the investor accept the low price now, it is likely to be much lower than the value of the underlying assets, and the investor is likely to take a much definiate loss now.

Is this fair to the investor, to be placed in a weak position against the financial institution that has the information and is taking advantage of the lack of information and desperation of the investor?

A similar situation applies in the case of the policyholder of a life insurance policy who wish to cash out. The cash value quoted by the insurance company is likely to be much lower than the actual underlying value. This allows the insurance company to make a profit on the terminated policy. The policyholder already suffered the large deductions to pay the commission to the agent, the cost of the life insurance cover and the high expenses. Why should the policyholder have to take another big penalty to give more profit to the insurance company?

The lesson: do not trust any financial institution that creates proprietary products where there is no free market for selling off the product at its fair value. You will be placed under the mercy of the financial institution, which will seek to maximise its profits at your expense.

It is easy to be cheated (6) - Currency linked notes

This is similar to the equity linked notes. They are usually marketed as Dual Currency Investments or Dual Currency Deposits. 

They are created by financial institutions and usually take the following form - the capital is invested in a certain foreign currency. If the currency rate stay above a certain price X during the specified , the investor gets a specified interest rate, which is higher than fixed deposit rate. 

If the currency rate fall below a certain price Y, the investors have to take delivery of the specified currency. The investors are told that they can keep the currency until it recovers in value. The investor think that it is all right to keep the currency.

This is how the investor can be cheated. If the specified currency goes up 10% during the holding period, the investor gets a certain interst rate, which is lower than the actual gain. The product issurer keeps the balance of the gain.  If the currency drops by 10%, the investor has to bear the full paper loss. 

There is no way for the retail investor to know if the terms of the transactions are fair. As the terms are determined by the product issuer, it is likely that the terms are created to make a profit for the issuer, at the expense of the investor.

Many people have lost a large proportion of their capital when the currency market goes against them. If the market goes in their favour, the received a higher interest rate, but they were not aware that this is much lower than the actual gain.  

To make the matter worse, some financial institutions lend money to take five times of the risk of the invested capital. The retail investors were not aware that their risk has increased five times due to the leverage. If the currency drops 20%, they could lose their entire capital. They do not get a commensurate return if the share price moves in their favour! 

Is this fair? Can it be considered as cheating?

Tan Kin Lian

 

Logic Quiz 5-1 (Vol 4)

This is more difficult, as it involves 5 houses.

 There are five houses with different colours in a row. Each occupant plays a different sport, keeps a different pet and drinks a different beverage.

 1. The tennis player lives in the red house.
 2. The pekingese owner drinks brandy.
 3. The soccer player lives right of the brown house.
 4. The rugby player drinks martini.
 5. Edward drinks vodka.
 6. The rum drinker lives in the green house.
 7. The cricket player lives left of the whiskey drinker.
 8. Daniel keeps pomeranian.
 9. Albert lives in the white house.
10. The poodle owner lives left of the collie owner.
11. Henry lives right of the yellow house.
12. Bobby plays basketball.
13. The brown house is the fourth house.
14. The white house is the second house.

 Question: Who keeps schnauzer?

Give your answer here. The correct answer will be displayed when you submit your entry.

Benchmark
1 to 10 mins: very good
10 to 15 min: good
15 to 20 mins: fair
more than 20 mins: need more practice! 

More of the quiz
It appears every Sunday in The New Paper.
You can buy my book at these bookstores:

It is easy to be cheated (5) - Equity linked notes

An equity linked note is created by a financial institution and usually takes the following form: the capital is linked to a specified share or basket of shares. If the share stay above a certain price during the specified , the investor gets a specified interest rate, which is higher than fixed deposit rate. 

If the share fall below a certain price, the investor has to take delivery of the share. The investor is told that they can keep the share until it recovers in value. The investor is happy to hold the share for the longer term, as it is from the shares of a reputable company.

This is how the investor can be cheated. If the share price goes up 10% during the period, the investor gets the specified interst rate, say 2%, and the remaining 8% goes to the product issuer.  If the share price drops by 10%, the investor has to bear the paper loss of 10%. 

There is no way for the retail investor to know if the terms of the transactions are fair, taking into account the relative probability of a gain or loss. 

Many people have lost a lot of money on these equity linked notes when the market gains against them. If the market goes in their favour, the only receive a part of the actual gain. 

To make the matter worse, the financial institution offer to lend money for the investor to take five times of the exposure. The investor is not aware that their risk has increased five times due to the leverage. If the share price drops 10%, they could lose 50% of their capital. They do not get a commensurate return if the share price moves in their favour! 

 Tan Kin Lian

 

Innovation through regulation

This article in the Economist stated that America's innovation in the technology market is achieved through regulation, rather than the free market.  

I believe that it is the duty of regulators to regulate and of government to govern.  Things cannot be left to the "free market" without proper regulation and safeguard.

Travel insurance does not cancel trip cancellation

A consumer bought travel insurance for her trip. She has to cancel the trip to North America  due to the H1N1 virus. The airline refused to refund the ticket fare, as the ticket was not refundable. The insurance company refused to pay for trip cancellation due to H1N1 virus under the travel policy, as it was not specifically covered. 

The response of the insurance company is unsatisfactory, for the following reason. A consumer buys travel insurance to protect against loss due to such unexpected events. The consumer is acting responsibly by cancelling the trip on the advice of the health authorities. It is unfair for the insurance company to refuse to meet this claim for reimbursement, by sticking to the narrow cover of the insurance policy.

Insurance companies make large profit on travel insurance, with claims amounting to less than 30% of the premuims paid. They pay high commission to travel agents to sell the insurance. They should act fairly by honouring legitimate claims, even though they are not within the tight legal defination of the cover.

If the insurance companies continue to think only of their profit, they will lose the trust of consumers.

It is easy to be cheated (4) - Participating policies

A participating life insurance policy offers a low guaranteed rate of return for the premiums paid over many years. The insurance company promised that, if the insurance fund earns a higher rate of return than the assumed rate (used to compute the premium), the additional return will be distributed in the from of non-guaranteed bonuses.

They project the bonus to show a fairly attractive return on the policy after it matures in many years time. The snag is that the bonuses are not guaranteed.

The consumer believed in the sales pitch by the insurance agent and buys the policy for the projected return. 

After the policy is issued, the insurance company may reduce the bonuses due to the low investment yield. However, the consumer cannot tell if the reduction is fair or is more than required. 

By paying a low rate of bonus, the insurance company is able to use the additional profits to strengthen its financial position, but this is at the expense of the policyholder. 

The low bonuses results makes the policy unattractive. To increase the sales, the insurance company introduces a new series of policies that give a more attactive return than the old policies, and trains the agent to sell the new series.  

If the policyholders decide to terminate the policies, they will suffer a large penalty as the cash value may represent less than half of the premiums paid. 

The insurance agents tell the policyholders that the low cash values is due to the insurance coverage provided by the policy. The real cost of the insurance coverage is less than one-fifth of the amount taken away. Most of the premium are taken away to pay commissions and expenses. 

Recently, many insurance companies reduce their annual bonuses and increase the terminal bonuses on the maturity of the policies or on death.  They use the terminal bonuses to show an attractive payout. However, the terminal bonuses are not guaranteed and may be reduced or withdrawn close to the payout date. 

If the policies are surrendered, these terminal bonuses are usually not paid, or paid at a lower rate than what is fairly due to the policyholders. There is no way that the policyholders can find out if they have been give a fair payout. 

In some countries. there are stronger measures to protect the interests of the policyholders and ensure that they are fairly treated. In other countries, the level of protection of the policyholders are weak. 

Tan Kin Lian

The Standard:HKMA urges banks to act on allegations over structured products

"The Hong Kong Monetary Authority has asked banks selling complex structured products issued by Morgan Stanley to inform clients when such items become more risky.

It urged the banks to investigate allegations of mis-selling of these products.

The HKMA will also investigate those retail banks for any alleged marketing misconduct involving sales of credit-linked products, called Octave Notes, which have plunged in value, deputy chief executive Choi Yiu-kwan told a Legco panel yesterday.

"Distributors have to assess related transactions of products to see if there's been any mis-selling. If yes, they have to report to the HKMA," Choi told the Legco subcommitee probing the Lehman minibonds fiasco.

Choi said HKMA would not start issuing warnings when any structured products start to lose value. "It's inappropriate for regulators to warn against a specific product or a specific issuer when there's potential problems," Choi said. "When something happens, the issuer is responsible for minding investors."

Raymond Ho Chung-tai, chairman of the subcommittee, said the Securities and Futures Commission has so far declined to make public three reports on the minibonds fiasco. He said the subcommittee will continue to push for release of those reports.

Personal accident insurance

Dear Sir,

Thank you for your good work in educating common folks like us on Finance. I have a FA friend who recently looked for me to buy an accident policy. I like to understand more before deciding but could not find any information regarding  this.  Could you kindly advise on whether is it worth while to look into an accident policy.

 REPLY

Read this FAQ

http://www.tankinlian.com/faq/pa.html

Get quote from 3 companies and decide on which offer you the best rate and cover.

Excessive increase in motor insurance premium

Dear Mr. Tan

I read a report that an insurance company increased the premium for motor insurance by 400% on its renewal. The motorist is not able to get another insurance company to accept his risk. Is it fair for the premium to be increased by so much?

REPLY

The increase of 400% is excessive. The authority should set some reasonable cap on the increase in premium on its renewal. An increase of 100% is already too high. The customer should not be placed at the mercy of the insurance company.  The consumer should lodge a complaint with the Consumer Association (CASE) to take up this matter.

An alternative arrangement is for MAS to set up a residual market (or pool) for motorist who are not able to get insurance from the standard market. The premium rate for the residual market is higher, but cannot be excessive. The risk is the residual market is shared by the insurance companies in proportion to their share of the market.

State Funderal for Late Presidents - Learn from the South Koreans

MR   TAN KIN LIAN

Can you post this to your blog.

I refer to the news on 25 May 2009 “State Funeral for Roh” from Straits Times internet news.  It was reported that “South Korea is planning a state funeral for former president Roh Moo Hyun as thousands of people gathered in the nation's capital and his hometown to mourn him. Mr Roh jumped off a cliff near his rural home on Saturday after being hounded for weeks in a widening corruption scandal involving his family members.

His suicide came just 15 months after he left office and just when prosecutors were to announce if they would seek his arrest. Investigations centred on a payment of US$1 million (S$1.44 million) to his wife from a wealthy shoe manufacturer, and another of US$5 million by the same man to the husband of one of Mr Roh's nieces.”

I think we should learn from the South Korean that takes the people’s feeling and grants state funeral to ex-President Roh, although he is being investigated currently.

I know this may be old issue that President Ong Teng Cheong and President Devan Nair were not granted state funeral when they passed away.  Singapore should treasure the few good leaders we have.  Granting state funerals to true sons of Singapore is not only for the benefit of these respected pioneers, but more for the people of Singapore and generations to come.  Singaporeans need to have our very own hero and role model. 

I hope it is not too late to grant state funeral to President Ong Teng Cheong and President Devan Nair.   Even in communist China, Deng Xiao Peng also paid respect to those who died during cultural revolution, when the event settled down eventually. People need closure to events of life journey.  In essence, we are all pilgrim in each of our journey of life, some are greater but others are no-smaller. We are all little sparkles in the expanse of time and space.   Can somebody help us to make this petition to President Nathan?

CASHEW NUT

2 JUNE 2009

Tan Kin Lian's Magazine

This magazine contains the articles and FAQs written over the past two years. 

Invest in land banking

Dear Mr Tan,

Recently I have been approach by a friend to invest in land in the US. In your opinion, how safe is this kind of investment?

 REPLY

My views on land banking are set out in various articles in my blog. See below.

http://tankinlian.blogspot.com/search?q=land+banking

I do not like this type of investment. All the best!

The Standard:Octave Notes spark concerns

The Hong Kong Association of Banks said it is monitoring developments involving Octave Notes, credit-linked notes issued by Morgan Stanley that have plunged in value, while lawmakers said the issue could threaten Hong Kong's financial sector.

The association has not yet discussed the issue but will keep in touch with banking and securities regulators, chairman Peter Wong Tung-shun said. The issue is very complex, Wong added.

Democratic Party legislator Kam Nai-wai yesterday called on the 16 local distributing banks to buy back the Octave Notes at their full value. A special meeting of the financial affairs panel will discuss the issue on June 11.

``This is really a time bomb,'' Kam said.

Eight thousand Hongkongers invested a total of about HK$2 billion in Octave Notes, which invested in synthetic collateralized debt obligations.

``There has been mis-selling,'' said Peter Chan Kwong-yue, chairman of the Alliance of Lehman Brothers Victims. The product's name in Chinese is ``Smart Bond.''

``The translation is intentionally misleading,'' Chan said. ``They promoted Octave Notes very much the same as minibonds.''

Octave Notes Series 10, 11 and 12 used Lehman Brothers as a reference entity and are now worthless.

Some other series used bonds issued by collapsed institutions like Icelandic banks and Canadian papermaker Abitibi-Consolidated as a reference and are now worth less than 1 percent of their original value.

Dah Sing Banking Group managing director Derek Wong Hon-hing said Dah Sing Bank sold a ``very small amount'' of Octave Notes and has received ``very few complaints.''

The bank has kept in touch with those customers and will follow up on a case-by-case basis, Wong said.

A 54-year-old housewife, who gave her name as Chan, said she walked into her bank to update her passbook and before she left had been convinced to buy Octave Notes Series 11.

Chan said she lost HK$400,000 of her husband's money on the investment, which is now worth nothing, and is afraid to tell him lest he divorce her.

She said she has been seeking mental help because she is so distressed about the issue.

``I didn't think the bank would cheat me,'' she said. ``I hate the bank; I hate the government.''

It is easy to be cheated (3) - Credit linked notes

Many retail investors have lost large sums of money by investing in the credit linked notes, such as the minibonds, pinnacle notes, high notes and the jubilee notes. 

Several financial institutions sold these credit-linked notes to their customers. The customers were told that their monies were invested in a basket of bonds issued by highed rated companies. The chance of failure of any of these reference entities was small, and even if it materialises, their loss will only be a proportion of the invested capital, due to the diversification of the risk.

This turned out to be an incorrect description of the actual nature of the notes. The invested capital was actually used to provide the security for credit default swaps on the reference entities. If any of these entities failed, the entire capital would be lost. Instead of diversifying the risk of failure, they are taking six to eight times of the risk of failure of any single entity.

The capital was actually invested in other assets that carry their own credit risk. This adds to the total risk of loss of the capital.

The actual structure of these notes were contained in several hundred of pages of a prospectus and pricing statments. The documentation was not clear, even to knowledgeable financial experts who spent many hours to read them. Many people feel that these documents are written to conceal the real nature of the structured products.

The actual return received by the product issuer was considerably higher (due to the extremely high risk) than the yield of 5% given to the retail investors. These excess gain was earned by the issuers but was not disclosed in any documentation. There were several devices created to hide or siphon off these profits.

Due to the global recession, many credit linked notes failed, causing severe losses to the retail investors. The dishonest act was in the creation of these products, attempts made to hide the true nature of the risks and to siphon off the excess return to the product issuer.

Most distributors of these products were not aware about the true nature of the products and had negligently misrepresent the products as being safe for retail investors. They were only focused on generating large volume of sales to earn an attractive rate of commission. 

To avoid being cheated, it is important for retail investors to avoid all types of structured products, especially in an regulatory environment that is weak in protecting retail investors. 

Tan Kin Lian

Logic Quiz 4-2 (Vol 4)

There are four houses with different colours in a row. Each occupant plays a different instrument and keeps a different pet.

 1. The grey house is left of the red house.
 2. The salesman lives left of the teacher.
 3. The manager keeps maltese.
 4. The bass player lives in the red house.
 5. The brown house is the first house.
 6. The drum player keeps maltese.
 7. The flute player lives in the third house.
 8. The schnauzer owner lives in the yellow house.
 9. The teacher keeps pekingese.
10. The lawyer plays guitar.

Question: Who keeps pomeranian?

Give your answer here. The correct answer will be displayed when you submit your entry.

Benchmark
1 to 5 mins: very good
5 to 10 min: good
10 to 15 mins: fair
more than 15 mins: need more practice! 

More of the quiz
It appears every Sunday in The New Paper.
You can buy my book at these bookstores:

After submitting your answer, you will be given the link to a webpage that teaches the method to solve this puzzle. 

It is easy to be cheated (2) - Capital Protected Products

During the past ten years, many financial institutions introduced structured products, such as the capital guaranteed or capital protected products. They are designed to attract investors who do now wish to take investment risk, and wanted a better return than paid on fixed deposits. 

These structured products are usually issued for a term of 5 years. The capital is protected or guaranteed. The investors were told that the capital is protected and they can earn a higher rate of return.  

To provide the capital protection, about 80% of the money is invested in a low risk bond to produce the capital return on the maturity date. Of the remaining 20%, about 10% is taken away as expenses, distribution cost and profit for the issuer. The remaining 10% is used to buy an option that has a small chance of earning a high return, but a larger chance of returning nothing. 

Most investors of these products got back only their capital after five years, with little or no gain. 

If the investors had bought the low risk bond, they would have received a return of 20%  for the 5 year period. The financial institutions did not want to sell the low risk bonds as they earned a small fee compared to the structured products (which paid a higher commission). 

To be fair, some distributors were not aware that the products were bad products. They were only concerned about earning the high commissions for distributing the products. They failed in their duty in giving the proper financial advise to their customers. 

During the period that these products were sold, the retail customers must have invested several billions of dollars and lost several hundred millions in the return that they would have obtained by investing in low risk bonds. Unfortunately, the financial institutions were not held accountable for selling these bad products. 

Tan Kin Lian

 

Benchmark premium rates

Some readers ask if it is possible to get $100,000 of cover in a term insurance policy and if it depends on age? 

You can refer to the benchmark rates here. Some insurance companies should be able to offer premium rates that meet these benchmark. You can call their hotline. 

Different Types of Life Insurance Policies

Dear Mr. Tan,

If you find the time, can you explain the different types of life insurance policies, such as whole life, endowment, term, ILP. I am quite confused about them.

REPLY

You can read this explanation. Please tell your friends to read it as well.

Try this test.

Preparing your case in FIDREC

Dear Mr. Tan,

I have just received a rejection letter from the bank that sold the minibond to me. I am devastated. What can I do now? Shall I go to FIDREC? What about the class action?

REPLY

Over the past five months, many investors have recieved a rejection letter or a low offer that they cannot accept.  The best course of action is through FIDREC. I have updated this guide on how to use FIDREC. I have found a lawyer who is willing to provide legal assistance to help the investor in the FIDREC process for a flat fee of $500. 

Various groups of investors have approached several lawyers to organise a class action. I understand that most of these efforts have stalled. The class actions required at least 500 participants to contribute $2,000 or more. They were not able to get an sufficient number of participants. 

Masdar - City of the Future

Watch this video.

It is easy to be cheated (1) - Introduction

I shall be writing a few articles about how easy it is for someone to be cheated in the world of investments. I shall be quoting from several recent experiences in Singapore, but I will not be mentioning specific products or organisations. You have to make a guess.

There will be lessons that can be learnt so that you are not caught in these scams. You have to worry about reputable organisations, as many of them are now engaged in these type of practices in their pursuit of profit.

It is easy for a consumer to be cheating from the following  types of products:

a) structured and banking products

b) insurance products

c) shares

d) trading in foreign currenty 

e) land banking and other non-listed products

f)  exotic products sold by private bankers

Nearly all investments are similar to gambling. The investor in speculating (i.e. gambling) on the price movement of the product. The speculator makes a profit when the price goes up and makes a loss when it goes down. The investor also has to make a choice in selecting the right product to invest it. 

It is easy for a small investor to be cheated in this environment by the other party who has better information or the ability to create the product to their advantage.

Even the cautious investor, who does not wish to take any speculative risk, can be conned into investing in products (such as the credit linked notes) that can wipe out the entire savings, without providing a commensurate rate of return. Some are offered products that have already turned bad, but are packaged in a misleading manner at an over-inflated price. They are being cheated!

Do come to my blog daily to read about these stories and take the lessons to avoid being cheated of your hard earned money.

Tan Kin Lian

AGM of NTUC Income

I attended the AGM of NTUC Income and raised several questions. I shall post the answers separately. 

I wanted to submit a nomination for the board of directors, to represent the policyholders. However, the nominee decided to withdraw at the last minute. He felt that most of the attendees were staff and agents of Income, and would have voted in favour of the CEO - who was standing for re-election. I have to respect his wishes.

There appeared to be insufficient policyholders (who were not staff or agents) at the AGM. Even if they were there, most of them preferred not to ask any question or follow up questions.

 

Logic Quiz 4-1 (Vol 4)

There are four houses with different colours in a row. Each occupant plays a different sport and drinks a different beverage.

 1. The engineer drinks whiskey.
 2. The golf player lives in the last house.
 3. The volleyball player lives in the grey house.
 4. The rugby player drinks rum.
 5. The scientist plays cricket.
 6. The green house is left of the grey house.
 7. The engineer lives in the blue house.
 8. The accountant lives left of the scientist.
 9. The salesman lives in the first house.
10. The vodka drinker lives in the purple house.

Question: Who drinks wine?

Record your time and give your answer here. You will be given the correct answer, after you submit your entry.

Benchmark
1 to 5 mins: very good
5 to 10 min: good
10 to 15 mins: fair
more than 15 mins: need more practice! 

More of the quiz
It appears every Sunday in The New Paper.
You can buy my book at these bookstores:

The spectre of death

Dr. Wong Wee Nam wrote an article about H1Ni virus in this blog. It is written clearly for the layman and explains why there is no need to have undue concern about this virus at the present time. 

Generally, Singaporeans tend to over-react to any type of perceived risk (claiming that a "black swan" event could occur). It is good to hear from the experts. In this respect, he quoted Professor Lee Wei Ling who shared the same idea.

Dr. Wong has contested in past general elections as an candidate from the alternative parties.

Automated vehicles - to arrive soon?

I have posted several interesting articles in this blog.

Uncertain distribution of bonuses

In recent months, I have received many e-mails from policyholders of various insurance companies asking about the reduction in the bonuses on their participating policies. The companies explained that the bonus cuts were necessary in the light of the financial situation and indicated that the terminal bonus will be increased to give a high payout on the policies.

However, the terminal bonuses are not guaranteed and many years later, these policyholders are told that the terminal bonuses have to be cut due to some other reasons at that time. 

The insurance company claimed that the bonus rates have been approved by the appointed actuary and fairly distributed to policyholders. What is fair is subjective and may not be fair from the prespective of the policyholders - as they have no say. 

Many policyholders have found that the bonuses have been reduced compared to what they were told at the point of sale, and that the insurance company continued to make bigger profits for shareholders and pay higher managenent expenses and commissions. They are not convinced that they have been fairly treated over the years, but they have no way to exercise their contractual or legal rights.

This practice has been prevailing in some insurance companies in past years and has now spread to many other companies. It is now becoming quite common for insurance companies to treat their policyholders in this arbitrary manner.

In some countries, the regulator has insisted on the use of asset shares to determine the bonuses to be distributed to participating policyholders. They have also placed caps on the amounts of commission and expenses that can be charged to the life insurance fund.  Malaysia has introduced these measures to a satisfactory degree.  I hope that Singapore will implement similar measures for the protection of the policyholders.

While the situation remains unclear and arbitrary, it is best for consumers to avoid putting in a lot of savings in a life insurance policy. These includes endowment, whole life, critical illness and investment linked policies sold with high commissions to the agents. You have locking the savings for a long time and is likely to get a poor return. If you terminate the plan in the earlier years, you will to suffer a large loss with have to lose more than half of your savings. 

It is all right to pay a low rate of premium for a term insurance policy, including a rider that covers critical illness. The cost should be less than $2 for every $1,000 of coverage. If you cover $100,000, the premium should be kept to $200 a year, or less.

Tan Kin Lian

Puzzle - The three coins

Joe: "I'm going to toss three coins in the air. If they all fall heads, I'll give you $2. If they all fall talls, I'll give you $2. But if they fall any other way, you have to give me $1."

Jim: "Let me think about this a minute. At least two cins will have to be alike because if two don't match, the thrid will have to match one of the other two. And if two are alike, then the thrid coin will match the other two and not match them. The chances are even that the third coin will or won't match. Therefore the chances must be even that Joe is better $2 against my $1 that they won't be alike, so the bet should be in my favor. Okay, Joe, I'll take the bet.

Was it waise for Jim to acept the bet?

Give your answer here. You can seel the solution after submitting the answer.

 

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. 

Benchmark:

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 here.

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

EXECUTIVE SUMMARY

“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.

 

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).

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.

Flying over the glaciers in Juneau, Alaska

Getting into the seaplane.

View of glacier from the plane

Another view of the glacier

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. 
http://www.chinaknowledge.com/Newswires/News_Detail.aspx?type=1&NewsID=23848

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?

REPLY
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.

http://news.bbc.co.uk/2/hi/business/8056993.stm

Lehman Role Probed in Selling Securities

onlineWSJ, 21 May

http://online.wsj.com/article/SB124286228762941197.html#mod=rss_whats_news_us

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.

Reuters.com - 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.

KEY QUESTION UNANSWERED

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.