Flawed Financial Products

[rodent2005]

intellectually you are not wrong

He's dead wrong. If a reputable bank asks you to buy a product and makes you believe by representation, omission or conduct that it is risk free, and yet gives a higher return than fixed deposits, it is reasonable for anyone to purchase that product.

Keeping money in the bank with low return is not necessarily the best move as finance professionals will tell you because you are not optimising the returns of your assets.

Of course with hindsight, everyone can sound like a genius.

 

[scroobal]

He's dead wrong. If a reputable bank asks you to buy a product and makes you believe by representation, omission or conduct that it is risk free, and yet gives a higher return than fixed deposits, it is reasonable for anyone to purchase that product.

Keeping money in the bank with low return is not necessarily the best move as finance professionals will tell you because you are not optimising the returns of your assets.

Of course with hindsight, everyone can sound like a genius.

Have to disagree. Why you think a very tiny portion of Singaporeans actually bought the products when it was advertised heavily, the ambush at DBS counters, the mail outs etc

Of course, you might argue that only they got money, only they were intelligent enough to grab the offer etc.

The fact remains that the difference from deposit to this product is more than 4 times. Why? God's gift to this selected few?

If a supermarkets offers deep discount for something that is in the fish and vegetable section, do you think that I will buy straighaway

I would like to think that many bought but they were prepared to take the risk, at the time of purchase, the economy here and the world were good and default was unlikely. Since this happenned, I have to come know a few acquaintences that have purchased it - absolutely reasonable people and they actually told me that the prospectus was correct and they don't have a leg to stand on but will readily avail themselves to any offer of redemption and compensation. They also told me that they will not sell at market rate.

Your posting is too simplistic. Financial advisors will always tell you to spread your risk - thats the first rule. They will never ever tell you to buy the product with higher yield. If it was that simple as that, why have Financial advisors, everyone queue up and buy product with higher yield because the bank is well known and those that place their money in normal deposit should be admitted to the asylum by your reasoning.

 

[Zombie]

If a reputable bank asks you to buy a product and makes you believe by representation, omission or conduct that it is risk free, and yet gives a higher return than fixed deposits, it is reasonable for anyone to purchase that product.

it is risk free,
and yet gives a higher return than fixed deposits,

This is oxymoron.
If someone bites this, it is ignorance, stupidity or greed.

 

[rodent2005]

it is risk free,
and yet gives a higher return than fixed deposits,

This is oxymoron.
If someone bites this, it is ignorance, stupidity or greed.

It doesn't matter what the motivation of the buyer actually was. Point is: was he/ she misrepresentated as to the nature of the product? The riskiness of the product? Was the product sold to someone that does not match the risk profile entailed by the product?

People gets defrauded because they fell too easily to easy ruses, but that does not absolve the fraudster and that does not deny the right of the deceived to be reinstated.

 

[rodent2005]

If a supermarkets offers deep discount for something that is in the fish and vegetable section, do you think that I will buy straighaway

Using your analogy, I can only take fish and tell u so because I have serious allergy to any other kind of meat no matter how small the quantity but u sold me a pie with pork content saying there is no meat other than fish in it.

Of course u must concede understanding the risk of a financial product is not as easily discernible as telling the difference between fish and pork.

I'm not saying ALL should be compensated as some like your acquainstances bought the product with eyes wide open.

But some are most likely genuinely totally misled like those uneducated ah ngs and ah peks. These people may not even know what questions to ask and what things to look out for.

Others are willing to tolerate a bit of risk but not that kind of risk in the product.

 

[Glaringly]

Not forgetting, a lot of old folks had live through a prolong period of time where fixed depoist interest rate are close to 10%.

How on earth would they suspect a reputable bank is out to fool them?

 

[scroobal]

But some are most likely genuinely totally misled like those uneducated ah ngs and ah peks. These people may not even know what questions to ask and what things to look out for.

No arguments there. The vulnerable class should be compensated.

 

[Goh Meng Seng]

Have to disagree. Why you think a very tiny portion of Singaporeans actually bought the products when it was advertised heavily, the ambush at DBS counters, the mail outs etc

Of course, you might argue that only they got money, only they were intelligent enough to grab the offer etc.

The fact remains that the difference from deposit to this product is more than 4 times. Why? God's gift to this selected few?

If a supermarkets offers deep discount for something that is in the fish and vegetable section, do you think that I will buy straighaway

I would like to think that many bought but they were prepared to take the risk, at the time of purchase, the economy here and the world were good and default was unlikely. Since this happenned, I have to come know a few acquaintences that have purchased it - absolutely reasonable people and they actually told me that the prospectus was correct and they don't have a leg to stand on but will readily avail themselves to any offer of redemption and compensation. They also told me that they will not sell at market rate.

Your posting is too simplistic. Financial advisors will always tell you to spread your risk - thats the first rule. They will never ever tell you to buy the product with higher yield. If it was that simple as that, why have Financial advisors, everyone queue up and buy product with higher yield because the bank is well known and those that place their money in normal deposit should be admitted to the asylum by your reasoning.

Dear Scroobal,

The question here lies in:

1) Is this a HIGH RISK product?
2) If yes, why would it be sold as an alternative to low risk Fixed Deposits?
3) I have seen the pricing statement and all that, which is the basic sales engagement material. Beside putting up the risk of Credit Event on the six reference entities under "Risk Statement", nothing was said about the Risk of the underlying assets, which happens to the MAIN HIGH RISK.

This is a clear mis-selling and misrepresentation.

There are more detailed and delicate points about the prospectus (the series prospectus and the base prospectus) that I shall not go into. But generally, anyone without legal AND financial background would have been lost in the legal and financial jargons stated in the prospectus.

As far as I can see, the Six Reference Entities is just a distraction away from the main risk on the underlying assets. The nature of the Six Reference Entities gives people the impression of SAFE and SOUND corporates.

But the fact is, the whole structure of the product is basically a scheme for Lehman Brothers to GET (not borrow, sell bonds or anything like that) money from investors to gamble in high risk high leverage derivative market without having to be responsible to the risk of defaults on these derivatives.

It surprises me that your friend actually thinks that the returns of 5% is reasonable for such High Risk to be born by investors.

If he or she really thinks so, tell you what, introduce them to me, tell them to give me $10,000 and I will take this money to gamble at Genting. If I win big, I will give them 10% (not 5%) of the winning plus their principal amount. But if I lose, nothing to do with me, all losses will be born by them. Agree?

If they are not willing, then why would they think this Minibond gives a "reasonable returns"?

Goh Meng Seng

 

[jw5]

GMS

1. Agree with most of the points that you have made.
2. Your arguments would hold much more weight if they were made in parliament. You need to work hard to get yourself and perhaps a few of your colleagues into parliament in the next GE. I honestly believe that this is the only way for S'pore to progress and to make the current government more accountable, transparent and caring for the citizens.

 

[Goh Meng Seng]

GMS

1. Agree with most of the points that you have made.
2. Your arguments would hold much more weight if they were made in parliament. You need to work hard to get yourself and perhaps a few of your colleagues into parliament in the next GE. I honestly believe that this is the only way for S'pore to progress and to make the current government more accountable, transparent and caring for the citizens.

Dear Jw5,

Thank you for your consistent support throughout these years. However, at this point of time, I do not have any more desires to stand for elections due to my other commitments.

I am now only playing the role of social-political activist in helping political party (NSP) and people with worthy causes (Mr. Tan KL). I do not foresee my candidacy in the next GE; well maybe helping out in the background only.

Goh Meng Seng

 

[scroobal]

Beside putting up the risk of Credit Event on the six reference entities under "Risk Statement", nothing was said about the Risk of the underlying assets, which happens to the MAIN HIGH RISK.

How did you end up clasifying it as 'high risk'. Because it failed?

It surprises me that your friend actually thinks that the returns of 5% is reasonable for such High Risk to be born by investors.
Goh Meng Seng

You are wrongly assuming that it is a high risk product. Who the hell wants a 5% yield if it is stated as high risk product. Is it stated as high risk? Or you decided after your assessment that it is high risk.

Do you know why this product failed? Do you think that it is an isolated event that caused its failure or a structural failure in the financial system. Do you think that this happens on a regular basis or a once in a life time event like the Kobe earthquake and its effect on the futures markets?

 

[Goh Meng Seng]

How did you end up clasifying it as 'high risk'. Because it failed?




You are wrongly assuming that it is a high risk product. Who the hell wants a 5% yield if it is stated as high risk product. Is it stated as high risk? Or you decided after your assessment that it is high risk.

Do you know why this product failed? Do you think that it is an isolated event that caused its failure or a structural failure in the financial system. Do you think that this happens on a regular basis or a once in a life time event like the Kobe earthquake and its effect on the futures markets?

Dear Scroobal,

I do not assume it to be "High Risk" but by virtue of the product itself. You can take a look at the illustration that I have done on my blog:

http://singaporealternatives.blogspot.com/2008/10/this-is-what-minibonds-is-all-about.html

The money you have invested is used to buy high risk, high leverage CDOs and derivative products.

In fact, DBS top management has just ADMITTED that their DBS High Note 5 is HIGH RISK, from a scale of 10, its 8 or 9! DBS High Note 5 has similar structure like Minibond.

The remuneration of 5% did not match the amount of HIDDEN RISKS that the underlying assets.

Goh Meng Seng

 

[Goh Meng Seng]

How did you end up clasifying it as 'high risk'. Because it failed?

You are wrongly assuming that it is a high risk product. Who the hell wants a 5% yield if it is stated as high risk product. Is it stated as high risk? Or you decided after your assessment that it is high risk.

Do you know why this product failed? Do you think that it is an isolated event that caused its failure or a structural failure in the financial system. Do you think that this happens on a regular basis or a once in a life time event like the Kobe earthquake and its effect on the futures markets?

Dear Scroobal,

Technically speaking, this product has not "failed". Although Lehman Brothers has gone bankrupt, but it is only the Credit Default Swap party. The main risk lies in the diminished value of the underlying collateral assets used in this Credit Default Swap. These assets are all HIGH RISK derivative products.

Goh Meng Seng

 

[Goh Meng Seng]

For the benefits of many here, I shall post the article on what Minibond is all about:

The name "Minibonds" itself is a misleading word for investors. Whatever money you have invested in this "Minibonds" are not invested in bonds of the six reference banks or bonds issued by Lehman Brothers.

This is how it works. Lehman Brothers may or may not buy any bonds from the six reference banks but it is just using these banks as "reference entities", some sort as a "bet" with Minibonds holders. There are basically 5 entities involved in the Minibonds arrangement.

1)First of all, its Lehman Brothers as the credit risk swap (I will explain what credit risk swap entails in this case later) partner.

２）Secondly, Lehman Brothers has created an empty shell company Minibond Ltd which will issue the Minibonds to investors.

３）Third, the investors.

４）Forth, the money taken from investors will be invested in a basket of AA financial products from 150 companies which includes CDOs which is basically collateral debts obligations, some of them are related to SubPrime debts.

5) The reference banks which has nothing to do with investors' investment other than being a betting reference: i.e. if any one of them failed, it would be a credit event that make investors lose money to Lehman Brothers.

For simplicity to understand the whole arrangement, just take it that Lehman Brothers has bought some bonds from these six reference entities (banks) and it needs somebody to insure its risk of exposure to these banks. It did not insure its risks from insurance companies like AIG　but instead, via this Minibonds arrangement, bought insurance from investors like you.

Through the Credit Risk Swap, you as an investor has agreed to sell insurance to Lehman Brothers with regards to the reference entities. In order to become an insurance agents of Lehman Brothers, you will need to come up with money as collateral. This money is collected from you via the financial institutions that you bought the Minibonds and given to Minibond Ltd to invest in a basket of CDOs issued by 150 companies.

Whatever returns from these CDOs issued by these 150 companies (variable returns) are given to Lehman Brothers. In return, Lehman Brothers will give Minibonds Ltd a FIXED premium (most probably higher than 5.1%) and Minibonds Ltd will give investors 5.1% returns for their investment.

Now, the variable returns from the Collateral Assets may be higher or lower than 5.1% but investors will only get back 5.1%. It means that Lehman Brothers will take the risk of variable returns from these Collateral Assets in return for your risk taking on the reference entities. This complete the Credit Risks Swap, swapping your risks of variable returns for a fixed returns, while you in return, insured Lehman Brothers for their risk exposure to the Six reference entities.

The problem is that Minibonds Ltd, under the control of Lehman Brothers, may choose to invest in a higher risk instruments or CDOs because it would be very profitable if the returns from these investment is higher than 5.1% that Lehman Brothers promised you. Especially so, when they do not need to bear the risks of defaults these CDOs or any of the assets in the basket of Collateral Assets. The returns from these Collateral Assets, they take but you bear the risks of defaults from these assets.

Under the contract, once a CREDIT EVENT happens, the whole arrangement will be liquidated. The Credit Event involves:

1) If any one of the reference banks failed, it is considered as a Credit Event and the investors will have to pay Lehman Brothers for the insurance it bought via the Credit Risks Swap. Meaning, investors will lose all money invested.

2) If more than 11 companies of the 150 companies listed in the Collateral Assets failed, or a certain percentage of the CDOs or credit-linked derivatives held as Collateral Assets go into default, the whole Minibonds will be liquidated and any loss from these defaults will be born by investors (not Lehman Brothers).

But the definition of Credit Event does not includes the failing of Lehman Brothers as the Credit Risks Swap partner. Thus, at this moment, investors do no face immediate liquidation of the Minibonds and suffer immediate losses.

However, investors RISK losing a lot of money due to the fact that the value of the basket of CDOs and other credit-linked derivatives held as Collateral Assets has devalued tremendously due to the present financial crisis. The likelihood of a credit event triggered by the failing of a substantial number of companies within the list of 150 is very high at this moment.


Furthermore, as Lehman Brothers has gone into bankruptcy, it will no longer give you the 5.1% as it promised and in this financial crisis, the variable returns from the basket of CDOs and credit-linked derivatives would be nearly zero as most of them are linked to SubPrime products.

 

[scroobal]

In fact, DBS top management has just ADMITTED that their DBS High Note 5 is HIGH RISK, from a scale of 10, its 8 or 9! DBS High Note 5 has similar structure like Minibond.

The remuneration of 5% did not match the amount of HIDDEN RISKS that the underlying assets.

Goh Meng Seng

I wondered if the press had wrongly stated DBS views on this when I first read it. If that is accurate, then in agreement with you, we should sue the fucking pants out of these guys.

 

[lepkwl00]

"It would" is not a definitive expression.

Replacing "It would" with "It will", changes the meaning.

My apologies, its a typo. I am neither a language expert nor a lawyer. All I am providing is a basis for all the investors to contest their cases in the court of law if a satisfactory solution cannot be established with DBS.

In my opinion, using "it would" in the sentence will not diminish the culpability of DBS as they are bringing ambiguity into the meaning of the sentence and to what purpose? To give investors a false sense of security? But this is just my opinion and the best way to find out is in the court of law if all other negotiation efforts fail.

 

[Hans168]

Many years back I lost US$50k within 3 weeks buying a few units of shares in 10 mio fund managed by one of the USA big name. I found out much later that that it was highly leveraged and computer driven. The transactions were super fast and highly geared: this is were the fund managers made tonnes of money at unit-holders expense. The speed of the transaction made it impossible to keep track of you PnL. By the time you want to put a stop order it is too late or no use. This was also the shortest time my money were siphoned. The reams of documents I signed literally gave them all the rights to do whatever they want with my money. A USA CFO whom they wanted to appease or curry favour was allowed to get his money incl losses back but I wasn't.
This could be a blessing in disguise to me as it is a lesson I learnt otherwise I could be one of the many suckers in the current con jobs with the Mini Bonds etc..

 

[Hans168]

Ambush...... hahaha - I was ambushed at on POSB office after liquidating my Portfolio 8!
I scolded the gal for the money I din make after having locked up my funds for so many years in Portfolio 8 - heng ah!!
PS: at that point I was thoroughly convinced that these arseholes sell with commission in their mind; customer's interest is furthest from their mind!!!!

 

[Zombie]

In fact, DBS top management has just ADMITTED that their DBS High Note 5 is HIGH RISK, from a scale of 10, its 8 or 9! DBS High Note 5 has similar structure like Minibond.

DBS was just telling the investors that they are getting back at most 1 or 2 out of 10, ie 10%-20% money back.

I don't understand why they were so happy to hear that.

And if they think that forcing someone to agree 8 or 9 inside the pressure-cooking room, can make a difference to their case, they must be damn stupid.

 

[Zombie]

All I am providing is a basis for all the investors to contest their cases in the court of law if a satisfactory solution cannot be established with DBS.

Unless you can prove that the letter covers all situations....

You also need to prove that the letter affected the decisions to invest.