<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>Risky financial products: It's all to do with confidence
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I WISH to comment on the Lehman Brothers Minibonds affair. First of all, let me say I feel very sorry for the retirees who lost their money. They should be helped to recover it.
At the same time, I do not think it is the bank's fault for having sold them such financial products. To understand why, it is necessary to understand the nature of finance, which has a lot to do with confidence.
Every financial product has risk. Even an ordinary fixed deposit or savings account has risk. That is because banks borrow short-term money from depositors and lend it out long term. For example, your three months deposit with a bank could be loaned to a home buyer who signed a 20-year mortgage with the bank.
Thus if every depositor withdraws his money, the bank will go bust because it cannot get its money back from its long-term borrowers in time. But the risk of this happening is low because the depositors have confidence they can get their money back when they want it. Confidence means they don't ask for their money back. Banks typically keep less than 10 per cent cash to meet withdrawals. Thus if more than 10 per cent of depositors want their money back, the bank goes bust.
No matter how low the probability of that happening, it is not zero. This means bank runs will happen some day - but it will be a very rare event, perhaps once in a few centuries. Similarly, the financial crisis that caused the collapse of 185-year-old Lehman Brothers is a rare event.
The last comparable crisis was the Wall Street Crash of 1929 which took place nearly a century ago. People suddenly lost confidence in stocks and all sold at the same time.Thus the probability of a financial crisis of this magnitude that caused Lehman Brothers' collapse is in the ball park of 1 per cent.
So if a relationship manager tells you the probability of Lehman Brothers going bust is very low, he is telling you the truth. Therefore, it is unfair to blame banks for selling Lehman Brothers Minibonds to their customers.
Forcing banks to compensate customers for the losses will lead to unintended consequences. It was reported that many buyers are poorly educated retirees who cannot pronounce 'Minibonds' correctly (calling them 'Minibong'), let alone understand them. If the bank is forced to pay on the basis of educational level, it does not take a genius to realise they will not sell higher yielding but more risky products to the 'Minibong' crowd in the future.
The 'Minibong' people will soon become disgruntled and surly in that others can enjoy a higher rate of return than them, simply because they have one or two O levels more. Since a major financial crisis such as this one that can sink Lehman Brothers comes once in about 100 years, it means Minibongers will be unhappy 99 per cent of the time.
They will be forced to put their money in fixed deposits and savings accounts, which, as I explained earlier, also have risk. So what is to be done for retirees who lost their money? I think they should be treated with compassion, as you would the victims of a natural calamity such as an earthquake. What happened to them was in fact a financial earthquake for which no one is to blame.
I propose the Government set up a charitable fund to which the public and especially the banks are invited to donate. The Government should contribute on a one-for-one basis. Funds raised should go to help those older and less educated retirees. In this way, it is clear no one is at fault.
If not, why stop at Minibonds? I am an illiterate when it comes to car mechanics. My car recently broke down. I recall a few years ago, the salesman told me the car is wonderful and won't give me trouble. Can I get my money back? Tan Keng Soon
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I WISH to comment on the Lehman Brothers Minibonds affair. First of all, let me say I feel very sorry for the retirees who lost their money. They should be helped to recover it.
At the same time, I do not think it is the bank's fault for having sold them such financial products. To understand why, it is necessary to understand the nature of finance, which has a lot to do with confidence.
Every financial product has risk. Even an ordinary fixed deposit or savings account has risk. That is because banks borrow short-term money from depositors and lend it out long term. For example, your three months deposit with a bank could be loaned to a home buyer who signed a 20-year mortgage with the bank.
Thus if every depositor withdraws his money, the bank will go bust because it cannot get its money back from its long-term borrowers in time. But the risk of this happening is low because the depositors have confidence they can get their money back when they want it. Confidence means they don't ask for their money back. Banks typically keep less than 10 per cent cash to meet withdrawals. Thus if more than 10 per cent of depositors want their money back, the bank goes bust.
No matter how low the probability of that happening, it is not zero. This means bank runs will happen some day - but it will be a very rare event, perhaps once in a few centuries. Similarly, the financial crisis that caused the collapse of 185-year-old Lehman Brothers is a rare event.
The last comparable crisis was the Wall Street Crash of 1929 which took place nearly a century ago. People suddenly lost confidence in stocks and all sold at the same time.Thus the probability of a financial crisis of this magnitude that caused Lehman Brothers' collapse is in the ball park of 1 per cent.
So if a relationship manager tells you the probability of Lehman Brothers going bust is very low, he is telling you the truth. Therefore, it is unfair to blame banks for selling Lehman Brothers Minibonds to their customers.
Forcing banks to compensate customers for the losses will lead to unintended consequences. It was reported that many buyers are poorly educated retirees who cannot pronounce 'Minibonds' correctly (calling them 'Minibong'), let alone understand them. If the bank is forced to pay on the basis of educational level, it does not take a genius to realise they will not sell higher yielding but more risky products to the 'Minibong' crowd in the future.
The 'Minibong' people will soon become disgruntled and surly in that others can enjoy a higher rate of return than them, simply because they have one or two O levels more. Since a major financial crisis such as this one that can sink Lehman Brothers comes once in about 100 years, it means Minibongers will be unhappy 99 per cent of the time.
They will be forced to put their money in fixed deposits and savings accounts, which, as I explained earlier, also have risk. So what is to be done for retirees who lost their money? I think they should be treated with compassion, as you would the victims of a natural calamity such as an earthquake. What happened to them was in fact a financial earthquake for which no one is to blame.
I propose the Government set up a charitable fund to which the public and especially the banks are invited to donate. The Government should contribute on a one-for-one basis. Funds raised should go to help those older and less educated retirees. In this way, it is clear no one is at fault.
If not, why stop at Minibonds? I am an illiterate when it comes to car mechanics. My car recently broke down. I recall a few years ago, the salesman told me the car is wonderful and won't give me trouble. Can I get my money back? Tan Keng Soon
