Minibonds Allocation of Responsibility

[Goh Meng Seng]

From my blog singaporealternatives.blogspot.com

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I have gathered a couple of news articles from Hong Kong which give better perspective of the whole issue.

What is MiniBond in the very first place? The picture above is a simple illustration I gather from Hong Kong Economics Daily newspaper. Yes, it is written in Traditional Chinese and I hope you could read it well.

Anyway, in short, the whole Minibond instrument comprises two parts:

1) The AA or AAA bonds as the basis of the structure (Right side of the diagram)
2) The Credit Risks Swap which involves a Vehicle (in this case, Lehman Brother's collective of financial bonds and instruments).

The first part (right part of the diagram) of the instrument is easy to understand. The money paid by the investors are used to buy AA or better rated bonds. The coupon rate or interest payment by the bonds are given to the investors on an annual basis.

However, to increase the returns of this instrument, the bonds are used as the basis to provide "insurance" for the other vehicle, like a collection of bonds or derivatives or financial entities. In this case, Lehman Brothers' collection of financial instruments. It means that Lehman Brothers will give the bond holders a certain percentage of premium to exchange for protection of its own credit risks. This is what Credit Risks Swap all about.

Literally, it means that Lehman Brothers, as an financial institution, needs to insure its own credit risk of honoring all the bonds or financial derivatives it sold in the market. Instead of buying financial insurance from a insurance company (or reassurance companies), it chose to pay a risk premium to Minibonds holders in return for an insurance against any of its losses in the event of credit events that it suffers.

Why would Lehman Brothers pay a risk premium to Minibonds holders for such Credit Risks Swap rather than buying insurance from a insurance company? Most probably it is much cheaper to do a Credit Risks Swap than paying hefty insurance premiums for its own credit risks.

The amount of "additional returns" that a Minibond provides for its investors depends on who or what the Credit Risks Swap is done with. If the Credit Risks Swap involves a collection of Junk Bonds, then naturally, due to the higher risks of Junk Bonds, the return would be higher. In this case, prior to the collapse of Lehman Brothers, it was considered as a relatively "low risk" financial entity by virtue of the facts that it was the 4th largest Investment Bank in USA. Thus the overall return of Lehman Brothers Minibonds is relatively low.

Well, if everything goes well and there is no credit issues or events for Lehman Brothers' collection of financial instruments, the investors could get all the interests paid plus the AA bonds they paid for when the Minibonds matured. But if there is anything happen to Lehman Brothers, then they could have to compensate Lehman Brothers for its loss due to these credit events like bankruptcy or inability to fulfill its financial liabilities. i.e. The Minibonds holders are required under the agreement, to act as an insurer of Lehman Brothers. It means that the AA bonds that are bought under the Minibond agreement would be cashed out and used as a compensation to Lehman Brothers to fulfill the obligation of the Credit Risks Swap.

This is the interesting part, small investors acting as insurer of a big investment bank!

The various articles have suggested that the regulators have not taken a pro-active stand in regulating the sales of these financial instruments. In the mini-bond issue, the returns are "improved" by virtue of the credit risks swap taken up by the financial instruments. In this case, Lehman Brothers bond is the vehicle that the bonds has taken up the risks swap. Yes, nobody would consider Lehman Brothers as a "high risk" financial entity but that is also why the returns is just 5.1%. If the vehicle involves consist of junk bonds, then one would expect a higher return.

The crux of the matter is whether investors are being misled in the whole dealings. But I guess the contract or agreement they have signed would have a clause that says the investors are briefed and understood the product, including all the risks involved. This is where the banks or financial institutions have covered their backsides. But the contract would most probably be very vague on what kind of risks they have explained to the investors. This is where improvement on regulation could be made. SPECIFIC risks and possibilities must be stated CLEARLY in BOLD, not in fine prints.

Even if the regulators come up with the requirement of putting different categories on the different financial instruments being sold, it is difficult to classify Mini-Bonds which involves two parts of financial structures: Bonds + Credit Risks Swap. Unless the regulations include the declaration of all possibilities of defaults and risks involves, I would say that no matter how good the products are marketed and sold, there will always be investors who will claim ignorance. Where does it end?

While I empathize with many aunty and uncle investors, but the point is, if they are not sure about what they are buying, they should not buy it in the very first place. If all investment decision in any instruments is solely based on the returns alone, then I would say that our investors, including aunties and uncles, will not evolve smarter at all. That is why I feel that we need to strengthen investors education. The plight of these aunty uncle investors is really sympathetic but they could not avoid their part of responsibility. If they chose to invest blindly, then they will have to bear the consequences. Very sad but this is basically how capitalist system works. Unless they could prove that they are being misled with clear evidence of mis-selling or misrepresentation by the institutions.

From the legislative perspective, there are rules could be set to avoid such chaos and disputes. For example, if the financial institutions that sold the financial products did not list out in BOLD of the various risks and possibilities within the marketing tools, contracts and agreements, then if one of the unlisted possibilities occurred and losses are incurred, then the investors should have the right to claim compensations from the financial institutions that sold them the products. For example, in this case, if the contract did not list the possibility of Lehman Brothers being bankrupted and the implications behind it, then the consumers have the right to claim compensations from the financial Institutions for their losses.

This will shift the burden of legal responsibilities of clear representation of risks to the financial institutions. If their presentation of risks is not all inclusive, then they will have to bear the risks of taking losses.

But I bet even with that legislation, there will always be investors that would claim ignorance. I mean, how would one measure the risk of Lehman Brothers being bankrupted at that point of time when it was the 4th largest investment bank in USA? It has no end. One has to learn that near zero possibility is NOT IMPOSSIBLE. However small the risk and possibility it is, there is still risks involved.

In the case of Hong Kong handling the issue of this MiniBond saga, the main argument is that those front line sales personnels are hardly trained and knowledgeable about this product that they were selling. I mean, this is a VERY COMPLEX derivative product that involves very abstract concept of credit risks swap. I would say that if the investors want to fight their case, they would have to provide all the marketing brochures and such, to show that the financial institutions did not explain or show clearly what a credit risks swap is all about. Then they could argue that the contract they have signed with that clause of claiming the investors have understood the product and all the risks involved, are totally invalid because due to this missing part of explaining credit risks swap.

This is the only plausible legal point that grievance investors could bring up against the financial institutions.

 

[Goh Meng Seng]

In my view, the regulatory body, MAS must bear part of the responsibility too. If any financially trained individuals would have difficulty in understand what a Minibond is all about at first sight, I wonder why MAS would allow it to be sold by banks to layman in the very first place. There is a clear lack of regulatory requirement or directions or guidelines to make stringent demands on the marketing effort of such complex financial instruments.

Furthermore, I think for banks that use their front line tellers to push sales of Minibonds is very irresponsible. I really doubt the front line tellers really know what Credit Risks Swap is all about and least, have the ability to explain clearly the risks involved in Credit Risks Swap to the customers, especially to the less educated aunties and uncles. This is both the lapse of MAS regulatory role as well as the banks' irresponsible moves as well.

Most customers would trust the banks as a more credible financial entity than an insurance agent or so call "financial consultant". This is the psychological effect of any normal persons. If one could entrust his money in this bank, naturally there is a level of trust on the credibility of the banks. Thus, most of the time, consumers would buy such "high return" financial instruments by virtue of basic trust on the banks' credibility, even though the banks' front line sales personnels may not be able to explain in full what the products entailed.

MAS should stop this practice by the banks, by means of regulation. Banks cannot sell complex structured financial instruments via its front line tellers. In fact, in USA, there is a strict distinction between Commercial Banks vs Investment Banks. Commercial Banks could only earn their keeps by taking in deposits and loaning them out. They are strictly regulated and disallowed to get involved in dealings with financial instruments with high leverage. Invest Banks are those who created all these mess with their financial innovations on derivatives.

I would suggest MAS to put a stop to such practice by banks in dealing with high leverage financial instruments by putting up categorization of each and every financial instruments approved for sales in Singapore. For example, if the financial instruments have a category of C, it means that it is a high risk, high return and high leverage financial instruments. Commercial Banks should be banned from selling or dealing with such financial instruments. Category A would be Government or Commercial bonds with AA or AAA ratings. This would be allowed for commercial banks... so on and so forth.

In my view, although the investors should bear bigger responsibility in taking up investment decisions, but MAS and the banks selling these Minibonds or High Notes could be totally excused from their part of responsibilities. MAS has failed miserably as a regulator in providing a clear guidelines in the sales of such financial instruments to the public.

If the PAP government could order cigarette packaging to bear big warning of lung cancer as well as tax-paid labels, I wonder why MAS has not taken similar steps in requesting financial institutions to put up BOLD and clear representation of ALL risks and possibilities involved in investing in any financial instruments. Furthermore, MAS should have prevented banks from selling complex structured, high leverage or risky instruments to layman. This should only be done by professional financial consultants instead.

And last but not least, I think the banks that sold these Minibonds would have to bear a level of responsibility in pushing the sales of such complex instruments when even their front line sales personnels may have limited knowledge about it. In fact, I would think that their credibility in the eyes of the public would be badly tarnished if nothing is done to compensate for their inconsiderate sales of such instruments to less educated aunties and uncles.

As for the investors, I could only say that if you want to prove their case against mis-selling, you would have to gather all marketing tools and materials to show that those sales personnels did not explain clearly what Credit Risks Swap is all about. Its not going to be an easy task to fight such cases against strong, big and mighty but I guess if all of you could unite and come together to go for class actions against irresponsibility sales of such instruments, you may have the chance to prove your case that even if you have signed that contractual agreement that says you have understood all about the product, but in fact, you have not been told about what the heck is Credit Risks Swap.

But ultimately, every potential investors in any financial instruments, even for investment related life insurance, we should be responsible enough to find out more about all these products before we commit our hard earned money into them.

Good Luck to you guys.

Goh Meng Seng

 

[Zombie]

A simpler explanation.

1) Lehman already invested in the bonds of 6-8 banks.
2) Lehman worries that any of 6-8 banks may collapse.
3) So Lehman gets Minibond Ltd into the arrangement.
4) You invest in minibonds of Minibond Ltd.
5) Minibond Ltd uses your money "not exactly but effectively" buys over the bonds of the 6-8 banks from Lehman.
6) Lehman can now use the money to invest into something safer.
7) But Lehman still continues to receive interests from the bonds of 6-8 banks, and must also pay you through Minibond Ltd the interests you should receive from minibonds.
8) Nothing happens till bonds/minibonds expire, everything be reversed at full principal amount.

If any of the 6-8 banks fails:
1) Everything to be reversed immediately.
2) Bonds of the 6-8 banks would fetch a very low price in the market.
3) This very low cash amount, and after costs, will be used to redeem all the minibonds from you.

If Lehman fails:
1) 6-8 banks are still ok. Lehman is not one of them
2) The bonds of the 6-8 banks, which secures your minibonds, are in the hands of Minibond Ltd.
3) Minibond Ltd and Lehman are two separate legal entities. They don't share the same financial obligations.
4) Because Lehman can no longer continue, the arrangement would be terminated and reversed out.
5) Selling the bonds of these 6-8 banks would be difficult and therefore fetch a lower market price (but it is not very likely that you will lose a big amount).
6) After costs, the cash will redeem all your minibonds.


My TKSS only.

 

[DIVISION1]

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

It is a pity GMS did not receive the best possible education to actualize his full potential.
But GMS can still serve Singapore well and constructively.

 

[Goh Meng Seng]

A simpler explanation.


If any of the 6-8 banks fails:
1) Everything to be reversed immediately.
2) Bonds of the 6-8 banks would fetch a very low price in the market.
3) This very low cash amount, and after costs, will be used to redeem all the minibonds from you.

If Lehman fails:
1) 6-8 banks are still ok. Lehman is not one of them
2) The bonds of the 6-8 banks, which secures your minibonds, are in the hands of Minibond Ltd.
3) Minibond Ltd and Lehman are two separate legal entities. They don't share the same financial obligations.
4) Because Lehman can no longer continue, the arrangement would be terminated and reversed out.
5) Selling the bonds of these 6-8 banks would be difficult and therefore fetch a lower market price (but it is not very likely that you will lose a big amount).
6) After costs, the cash will redeem all your minibonds.


My TKSS only.

I think there is a complication. The bonds of Credit Risks Swap, technically, belongs to Lehman. Thus, if Lehman fails, creditors of Lehman will have first right to these bonds it holds, not the Minibonds holders which held another set of AA bonds. But if Lehman suffers losses due creditors legal claim on these bonds, the Minibond holders will have to compensate Lehman Brothers for the losses. The contract of the Minibonds just state any "CREDIT EVENTS" that could lead to losses of these bonds. This is what I understand from newspapers.

If I gather it correctly, these bonds are not a collateral for the Minibonds that you bought. As a Minibond investor, you are only responsible for their credit risks, not specifically holding them as an entity. This is what the HK newspaper explained (see the picture in my blog). The bonds that you buy is another set of bonds which is just to show that you have the means to insure Lehman Brothers' risks exposure.

I may be wrong because all I have gathered are from Hong Kong financial papers.

Goh Meng Seng

 

[Goh Meng Seng]

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

It is a pity GMS did not receive the best possible education to actualize his full potential.
But GMS can still serve Singapore well and constructively.

Dear Div,

LOL! As a matter of fact, I only study for interests' sake. I am not from a wealthy family and I could not afford to go for further studies overseas. I do not really like taking up scholarships which will bond me for years.

Whatever it is, I have no regrets in my life for what I do or what I choose to do.

Goh Meng Seng

 

[Zombie]

I think there is a complication. The bonds of Credit Risks Swap, technically, belongs to Lehman. Thus, if Lehman fails, creditors of Lehman will have first right to these bonds it holds, not the Minibonds holders which held another set of AA bonds. But if Lehman suffers losses due creditors legal claim on these bonds, the Minibond holders will have to compensate Lehman Brothers for the losses. The contract of the Minibonds just state any "CREDIT EVENTS" that could lead to losses of these bonds. This is what I understand from newspapers.

There should be only "one set" of bonds.
Minibond Ltd issues you minibonds and uses your money to buy bonds from the 6-8 banks "on your behalf";
and at the same time in a back-to-back arrangement, Lehman would convert the bonds in their hands to some safer investments.

Financially speaking, the bonds are the underlying assets that secure the minibonds. The values of minibonds are subjected to the values of the bonds.

Looking at the titles of the bonds:

Before CE, the bonds are held by Minibond Ltd.

Once CE, Minibond Ltd must sell the bonds to Lehman at market value, which would now be at a "great discount". Effectively, this "great discount" is the realised value of the credit protection benefitting Lehman.

Technically, the bonds belong to Minibond Ltd, not Lehman. Lehman has the right to buy over the bonds once this right is triggered by CE. And CE refers to the failings of the 6-8 banks, not Lehman.

Anyway, let's assume Lehman's fall is also a CE. When Lehman files for bankruptcy, the bonds are not their assets "yet". And since all business operations must stop at the time of filing, Lehman does not have the capacity to "buy over" the bonds. So, the creditors of Lehman have no claims on those bonds.

Nevertheless, Lehman should be able to claim some compensations from the termination of the swap agreement from Minibond Ltd.

 

[madmansg]

how come SAF teach you to enslave your parents in your computer shop ?

 

[Goh Meng Seng]

There should be only "one set" of bonds.
Minibond Ltd issues you minibonds and uses your money to buy bonds from the 6-8 banks "on your behalf";
and at the same time in a back-to-back arrangement, Lehman would convert the bonds in their hands to some safer investments.

Financially speaking, the bonds are the underlying assets that secure the minibonds. The values of minibonds are subjected to the values of the bonds.

Looking at the titles of the bonds:

Before CE, the bonds are held by Minibond Ltd.

Once CE, Minibond Ltd must sell the bonds to Lehman at market value, which would now be at a "great discount". Effectively, this "great discount" is the realised value of the credit protection benefitting Lehman.

Technically, the bonds belong to Minibond Ltd, not Lehman. Lehman has the right to buy over the bonds once this right is triggered by CE. And CE refers to the failings of the 6-8 banks, not Lehman.

Anyway, let's assume Lehman's fall is also a CE. When Lehman files for bankruptcy, the bonds are not their assets "yet". And since all business operations must stop at the time of filing, Lehman does not have the capacity to "buy over" the bonds. So, the creditors of Lehman have no claims on those bonds.

Nevertheless, Lehman should be able to claim some compensations from the termination of the swap agreement from Minibond Ltd.

Dear Zombie,

This does not sound logical to me.

First of all, if the bonds bought are those bonds of six institutions, then there is really no need of Credit Risks Swap. Besides, if only one of the six institutions collapsed, then the loss will be only 1 out of six, not really possible to lose 100% of their capital investment. This does not make sense because there is no need to liquidate the whole arrangement.

The explanation by the HK Economics Daily is more logical. The money you invested are used to buy good rating AA bonds and it is used as a collateral to act as an insurance assets to insure a BIGGER collection of bonds bought by Lehman. The investors will get returns from the AA bonds they bought as well as the "risk premium" received from Lehman for the insurance of its collection of bonds (with bigger face value). This is logical because Lehman, assuming the six types of bonds are equal in size and 6 times bigger than the AA bonds bought by the minibonds holders, most probably pay 1/6 of a percent for each types of bonds they bought...adding up to be 1% in total for the minibonds investors.

Credit Risks Swap is a concept to reduce risks or insure the risks that one takes by giving part of the returns from the financial instruments they bought. It could be insured by a big reassurance company or it could be repackaged and split into smaller units to be born by many investors in terms of minibonds, using a better rating bonds as a collateral.

Goh Meng Seng

After note: Apparently there is a confusion here. I will have to make corrections. The money of the investors are invested in bonds from 6 institutions with AA rating. But this is not the end. These bonds are used as collateral in insuring a basket of financial instruments (which may include CDOs and such) held by Lehman as a credit risks swap. This is a more risky basket of financial instruments than the AA bonds bought.

GMS

 

[Zombie]

These bonds are used as collateral in insuring a basket of financial instruments (which may include CDOs and such) held by Lehman as a credit risks swap.
GMS

Ignoring the part between Minibond Ltd and the minibonds investors.

Between Lehman and Minibond Ltd is Credit Default Swap (and ignoring the swap of interests & currency).

Now See [w w w.youtube.com/watch?v=P2cUh-e_Qkc&feature=related]

Points to note:

1) Box: in green=Lehman, in red=MinibondLtd, in purple=Bonds6-8Banks

2) In movie: No physical swapping taken place until CE. Swap is a contractual obligation (a promise) at the beginning. Then see 3 below.

3) In our situation because of the contract:

a) Before CE, physical swap already taken place (like 3:42 in Movie, purple line). Lehman sells the bonds (with credit risks) to Minibond Ltd at 100% face value for cash, which can be invested into other things.

b) When CE, Minibond Ltd sells the bonds back to Lehman at "great discount". This price would be that best price Minibond Ltd can sell in the open market to recover cash.
Combining with a above, at the end when there is CE, Lehman takes back the bonds and Lehman received (100% - recoverable price) from Minibond Ltd. This is shown at 3:23 in movie, red dotted line.​

4) The main reason of 3a above, is that Lehman can distance itself totally from the bonds. This is protection at its best. Everything about the bonds sticks with the SPV, Minibond Ltd. You as investor will bear the risks.

The main reason of 3b above, is that Lehman may have for example contractual agreement to deliver the bonds to someone else. It would be better to ensure availablility of the bonds for later delivery than to buy from the open market some times later.




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[makapaaa]

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

It is a pity GMS did not receive the best possible education to actualize his full potential.
But GMS can still serve Singapore well and constructively.

Fxxx U! GMS has succeeded where your BEST paid and leegally corrupt owners haved FAILED!

 

[makapaaa]

>>>I wonder why MAS would allow it to be sold by banks to layman in the very first place. There is a clear lack of regulatory requirement or directions or guidelines to make stringent demands on the marketing effort of such complex financial instruments. <<<

If one could recall, the the Finance Ministar's wife was boasting about her grand vision of expanding the debt mkt in Peesai. Since the imperial decree has been issued, anything goes. Fxxx the Familee!

 

[cass888]

If I gather it correctly, these bonds are not a collateral for the Minibonds that you bought. As a Minibond investor, you are only responsible for their credit risks, not specifically holding them as an entity. This is what the HK newspaper explained (see the picture in my blog). The bonds that you buy is another set of bonds which is just to show that you have the means to insure Lehman Brothers' risks exposure.

I may be wrong because all I have gathered are from Hong Kong financial papers.

Even though you have qualified your statement, as a public figure, you ought to take more responsibility for any opinions you express. The truth is as follows:

​

<TABLE cellSpacing=0 cellPadding=4 width="100%" border=0><TBODY><TR><TD vAlign=top>

3.
​

</TD><TD>

How does the bankruptcy of Lehman Brothers Holdings Inc affect the notes?
Under the terms of each swap, the fact that Lehman Brothers Holdings Inc as guarantor of the swap has filed for bankruptcy protection in the United States gives Minibond Limited the right to elect to terminate the swap transaction which in turn would trigger an early redemption of the relevant series of notes. In the case of an early redemption, the terms of the notes provide that the underlying securities (i.e. the securities acquired by Minibond Limited with the proceeds of the notes) will be sold and the noteholders will be paid out of the proceeds from the sale after deducting any other liabilities which are payable from the proceeds in accordance with the terms of the notes. If the swaps are not terminated there will be no early redemption of the notes by Minibond Limited.

http://www.hsbc.com.sg/1/2/miscellaneous/minibond-notes-frequently-asked-questions
​

</TD></TR></TBODY></TABLE>

 

[makapaaa]

Even though you have qualified your statement, as a public figure, you ought to take more responsibility for any opinions you express. The truth is as follows:

​

<TABLE cellSpacing=0 cellPadding=4 width="100%" border=0><TBODY><TR><TD vAlign=top>

3.
​

</TD><TD>

How does the bankruptcy of Lehman Brothers Holdings Inc affect the notes?
Under the terms of each swap, the fact that Lehman Brothers Holdings Inc as guarantor of the swap has filed for bankruptcy protection in the United States gives Minibond Limited the right to elect to terminate the swap transaction which in turn would trigger an early redemption of the relevant series of notes. In the case of an early redemption, the terms of the notes provide that the underlying securities (i.e. the securities acquired by Minibond Limited with the proceeds of the notes) will be sold and the noteholders will be paid out of the proceeds from the sale after deducting any other liabilities which are payable from the proceeds in accordance with the terms of the notes. If the swaps are not terminated there will be no early redemption of the notes by Minibond Limited.

http://www.hsbc.com.sg/1/2/miscellaneous/minibond-notes-frequently-asked-questions
​

</TD></TR></TBODY></TABLE>

Ask the no. 1 public figure to stop hiding behind his daddy's skirt lah! Best paid in the world but chor boh lan till now and only dare to show face in F1.

 

[Goh Meng Seng]

Even though you have qualified your statement, as a public figure, you ought to take more responsibility for any opinions you express. The truth is as follows:

​

<TABLE cellSpacing=0 cellPadding=4 width="100%" border=0><TBODY><TR><TD vAlign=top>

3.
​

</TD><TD>

How does the bankruptcy of Lehman Brothers Holdings Inc affect the notes?
Under the terms of each swap, the fact that Lehman Brothers Holdings Inc as guarantor of the swap has filed for bankruptcy protection in the United States gives Minibond Limited the right to elect to terminate the swap transaction which in turn would trigger an early redemption of the relevant series of notes. In the case of an early redemption, the terms of the notes provide that the underlying securities (i.e. the securities acquired by Minibond Limited with the proceeds of the notes) will be sold and the noteholders will be paid out of the proceeds from the sale after deducting any other liabilities which are payable from the proceeds in accordance with the terms of the notes. If the swaps are not terminated there will be no early redemption of the notes by Minibond Limited.

http://www.hsbc.com.sg/1/2/miscellaneous/minibond-notes-frequently-asked-questions
​

</TD></TR></TBODY></TABLE>

Dear Cass888,

If this is the case, then really, there may not be a big problem. Once the credit risks swap is ceased, they will not be liable for any compensation for Lehman's loss on the swap entities.

They will redeem their money based on the AAA bonds Minibonds have bought for them as collateral in this arrangement. Unless, the AAA bonds involved includes Lehman's own bonds which may become junk bonds over night.

At this moment, everybody that invested in these minibonds assumes that they will lose almost everything but if what you have quoted is true, then this will not be the case. This is because the AAA bonds related to the minibonds are still good. As long as the administration costs is low and there is no obligations on the Credit Risks Swap to Lehman's woes, investors may just lose part of their investment.

But somehow, even the banks that sold these Minibonds do not know exactly what's going on there, thus the anxiety. I just hope that you are right in this case. However, the points on MAS' role in regulating these structured financial instruments are still valid. If what you said is correct, then the investors are just lucky. However, that does not mean that such Minibonds or High Notes bear no risks or low risks at all. If the Credit Risks Swap involved CDOs or subprime elements, there might be bigger losses for those who bought any financial instruments that insured such risks.

Goh Meng Seng

 

[DIVISION1]

Vulgarity solves nothing and neither does blind hate. Anger leads to the path of unthinking.

 

[Goh Meng Seng]

Even though you have qualified your statement, as a public figure, you ought to take more responsibility for any opinions you express. The truth is as follows:

​

<TABLE cellSpacing=0 cellPadding=4 width="100%" border=0><TBODY><TR><TD vAlign=top>

3.
​

</TD><TD>

How does the bankruptcy of Lehman Brothers Holdings Inc affect the notes?
Under the terms of each swap, the fact that Lehman Brothers Holdings Inc as guarantor of the swap has filed for bankruptcy protection in the United States gives Minibond Limited the right to elect to terminate the swap transaction which in turn would trigger an early redemption of the relevant series of notes. In the case of an early redemption, the terms of the notes provide that the underlying securities (i.e. the securities acquired by Minibond Limited with the proceeds of the notes) will be sold and the noteholders will be paid out of the proceeds from the sale after deducting any other liabilities which are payable from the proceeds in accordance with the terms of the notes. If the swaps are not terminated there will be no early redemption of the notes by Minibond Limited.

http://www.hsbc.com.sg/1/2/miscellaneous/minibond-notes-frequently-asked-questions
​

</TD></TR></TBODY></TABLE>

Oh, by the way, there is one catch here.

If the credit risks swap involves financial instruments created by Lehman, then there are implications. i.e. the minibonds investors may have to compensate for the defaults of these financial instruments. So far, nothing is mentioned about the bonds or financial instruments that the minibonds are supposed to insure.

Goh Meng Seng

 

[Goh Meng Seng]

Is Lehman Minibonds that "risky" in the first day?

According to Hong Kong news, Lehman Minibonds has been rated as AAA by Morgan Stanley at the time when it was launched. I guess that is why even the retailing banks thought that this is a "low risk" investment instrument with decent return.

The argument by the bank managers is that when World Class rating agency actually gives Lehman Minibonds an AAA rating, why would they think that it is a "risky" financial instrument?

But yet, there is a lack of understanding of what Lehman MiniBonds is all about. Most people think that it is just an investment of a collection of AA or AAA bonds without knowing exactly that it consists of a Credit Risks Swap of another basket of financial entities which include CDOs. Even if this is so, CDOs at that time were not considered as "bad financial instruments".

Thus, I guess it is only on hindsight, after the subprime explosing with insolvency of many big financial institutions in the World that people realize whatever considered as "low risk" with AAA ratings have now become junk rating.

Goh Meng Seng

 

[Zombie]

These bonds are used as collateral in insuring a basket of financial instruments (which may include CDOs and such) held by Lehman as a credit risks swap. This is a more risky basket of financial instruments than the AA bonds bought.
GMS

You were saying that the bonds are collaterals for Lehman.

If this is the case, then really, there may not be a big problem. Once the credit risks swap is ceased, they will not be liable for any compensation for Lehman's loss on the swap entities.
They will redeem their money based on the AAA bonds Minibonds have bought for them as collateral in this arrangement.

You were saying that the bonds are collaterals for Minibond Investors.


So you are saying that
if the termination is not caused by Lehman's fall, the former applies; and
if the termination is caused by Lehman's fall, the latter applies.


You are really confused.

 

[Zombie]

But yet, there is a lack of understanding of what Lehman MiniBonds is all about. Most people think that it is just an investment of a collection of AA or AAA bonds without knowing exactly that it consists of a Credit Risks Swap of another basket of financial entities which include CDOs. Even if this is so, CDOs at that time were not considered as "bad financial instruments".

Do you know what is the understanding?

Most People: It is just an investment of a collection of AA or AAA bonds.

Mr GohMS: It is an investment of a collection of AA or AAA bonds, which consists a Credit Risks Swap of another basket of financial entities which include CDOs.

Actual case:

It NEEDS NOT BE a collection of AA or AAA bonds, EVEN IF the "Credit Events" relates to the AA or AAA bonds.

• On one hand, "Credit Events" relates to the AA or AAA bonds. But no possession of asset is needed in the Credit Default Swap (see video in ealier post).
• On the other hand, the SPV can take your money and "buys" any assets with default concerns, directly/indirectly from Lehman (or its affiliates).

This two parts are totally "unrelated" but can be merged into one like the Bond of 6-8 banks example I mentioned earlier.