Donch Expect PAPee Cheats to Help Sporns!

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<TABLE border=0 cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR>Structured products: Misled by unfounded commercial logic
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<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to last Wednesday's letter, 'Government must block finance products that make no sense', and agree with Mr Ong Eng Hin. Structured financial products (SFDs) are innovations of US financial engineers under the deregulated financial system. We are a world apart in geography and financial system from the United States. Low interest rates from fixed deposits opened the opportunity for SFDs to thrive. Who would doubt the integrity of world-renowned banks offering SFDs with 'fixed interest yield bond' at 5 to 6 per cent over five years?
How many educated investors could realise that SFDs from the US contain collateralised debt obligations held by banks, which diversify the risks by magnifying the default risk and sell the SFDs at a profit. In fact, all the derivatives were based on the same debt.
Wall Street's smart financial engineers scale and magnify the volume of each debt (one borrower from one original bank) to an unlimited number with a supposed securitisation process and insurance to sell them to other investors. Who could explain why one credit default could trigger the collapse of all seemingly unrelated SFDs?
Nobel laureate and economist Paul Krugman summarised SFDs thus: 'Loans no longer stayed with the lender. Instead they were sold to others, who sliced, diced and pureed individual debts to synthesise new asset. Sub-prime mortgages, credit card debts and car loans all went into the financial system's juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process. But the wizards were frauds... The key promise of securitisation - that it would make the financial system more robust by spreading risk widely - turned out to be a lie.'
Billionaire investor Warren Buffett shunned SFDs because he refused to be misled by the unfounded commercial logic of attractive high-interest return. If SFDs are 'frauds and lies', as explained by Mr Krugman, how could young, educated and 'financial-savvy' investors escape such a sophisticated 'scam of the century'?
Paul Chan

 

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<TABLE border=0 cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR>Structured products: Selling practices should be policed rigorously
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<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to last Wednesday's letter by Mr Ong Eng Hin, 'Government must block finance products that makes no sense'.
I cannot agree with his suggestion.
I attended a structured products course two years ago and the key takeaway for me was that, subject to their own internal risk management processes and for a fee, financial institutions can structure almost any type of products to suit clients' investment objectives. It takes two hands to clap, so why block financial innovation and creativity?
Before committing to any product, retail investors should spend two minutes on a simple question - how can the bank pay you a much higher return if the risk level of such structured products is the same as that of regular fixed deposits? There are no free lunches and the risk-reward concept of investment is a simple one that has existed since time immemorial. When such structured products yield good returns for so-called victimised retail investors, would anyone question the commercial sense of such products? I call this common sense. Besides, is greed not part of the equation here too?
Banks and financial institutions must understand their clients' financial knowledge, investment objectives and sophistication before selling any product to them. If the authorities block certain financial products, it would be tantamount to micro-managing the system and only increase the ignorance level of retail investors.
There should be increased efforts, jointly sponsored by the authorities, banks and financial institutions, to educate the public on the complexity of financial products and their risks. Only by reaching out to the public with proper education in a language they understand can retail investors be equipped with adequate information to make their own investment decisions, rightly or wrongly, and bear responsibility for them.
While accurate product disclosure is important, it is not in banks or financial institutions' interest to intentionally conceal risky product features just to mislead investors into buying their products. Their reputation is at stake.
Having the right people equipped with the right knowledge to sell products that suit their clients is a complicated process, so proper training is crucial. In the absence of prescriptive guidelines, selling practices among representatives will differ, as remuneration structures are often tied to the volume of sales generated.
It is also a question of ethics. Before selling a product to a client, bank representatives should ask themselves a simple question. If the client is a retiree in the same age range as the representative's own parents, would he have advised his parents to put their retirement funds in the product? If the client is in the same age range as the representative himself, would he buy the product with his own savings?
Therefore, selling practices should be rigorously policed by the banks and financial institutions themselves, reviewed and questioned by auditors periodically, and checked by the authorities from time to time.
Chionh Chye Kit