Friday, October 31, 2008

Protest against DBS in Hong Kong...

Add Hong Kong : Protest against DBS to your page

Courtesy of Wayang Party.

Press Release from High Notes Investor Group.

They have a blog :

These people are making a case, one which I said is a very logical case:

1. DBS High Notes where so risky they were simply very bad products with a very high risk of failure.
2. This high risk of failure was not communicated to investors of this product which is clearly unsuitable for ordinary folks.
3. Instead of case by case assessment, DBS should consider a collective settlement.

DBS clearly packaged a bad product and sold it to people who shouldn't be buying it. DBS should do the right thing and work out an acceptable compensation for these people.
High Notes Investor Group - Press release 30 Oct 08
1. On Thursday 30th October 2008, in response to a petition by the High Notes Investor Group (HNIG), DBS met up with approximately 400 investors of their DBS High Notes 5 (HN5)
product in two separate sessions. Session 1 started at 2.00pm and Session 2 was at 5.00pm.
2. Both sessions were originally scheduled to last one hour, but eventually ran for more than two and a half hours each time.
3 Many attendees urged DBS to treat all investors as a group rather than go through a case-by-case process on the subject of compensation.
4.To buttress the above argument, the HNIG revealed at the forum that they had requested an industry insider who has experience structuring such products to go through the HN5 pricing statement. After a six-hour preliminary analysis of both the document as well as the real-life experiences of investors, it would seem that in HN5, there appears to be SYSTEMIC Failure on three fronts:
a) Failure in the PRODUCT
i) Product was arranged, issued and sold by DBS
ii) Product was leveraged on Credit Default Swaps
iii) Product was secured on CDOs
b) Failure in the SALES PROCESS
i) Product was sold through a large sales force who were inadequately trained, and
ii) Relationship managers who were and are still not familiar with HN5 and customer’s suitability
i) HN5 was sold to inappropriate customers
ii) HN5 was targeted at customers with little or no knowledge of financial concepts like CDS, CDOs, and Leverage
Because of the failures in the product itself, we are asking DBS to undertake compensation in a blanket or collective manner, and not on a case-by-case basis.
5. DBS was also questioned on the issue of RISK MANAGEMENT – there appears to have been serious lapses in this area that has resulted in a detrimental impact on the customers of HN5.
6. In response to questioning, Mr Rajan Raju, Head of Consumer Banking admitted that the HN5 is “NOT a low risk product”. Further, in response to a pointed question on the actual risks inherent in HN5, Ms Frances Chan, Senior Vice-President revealed that, on a scale of 1 to 10, the HN5 product was a “8 to 9”. We feel that a risk factor as high as this is in no way commensurate with the relatively low returns from HN5 and a locked-in period of 5.5 years. This bolsters our argument of the presence of a Systemic Failure in HN5.
Other Highlights
7. One attendee questioned the rationale for GIC to pump billions of dollars of government reserves into UBS and Citigroup to bail out foreigners while a government-linked bank like DBS is being parsimonious in compensating its customers in a cut-and-dried case of mis-selling and misrepresentation.
8. Many attendees highlighted their long-standing relationships with POSB/DBS, some stretching over a period of more than 30 years. They expressed a deeply felt sense of betrayal by DBS which they said violated their trust in the bank. Many also spoke of their past willingness to buy products from DBS because they saw it as “the national bank” they could have complete trust in.
9. There were detailed questioning on DBS’s ability and competence in giving timely advice on the status of HN5. Attendees referred specifically to a letter dated 31 March 2008 which had actually advised DBS customers to hold HN5 to maturity.
10. At least one attendee made the point that the overall mishandling by DBS of its affected customers will result in an eventual pulling-out of funds from DBS to its competitor banks, with a concomitant negative impact on its share price. The latter had already fallen drastically in recent weeks, a phenomenon which most analysts attributed partly to the fallout from its High Notes 5 debacle.
11. The immediate post-forum reaction of most attendees is that the Thursday sessions have not moved the complaint nor the compensation processes forward in any significant manner. In comments to HNIG, many people expressed the doubt that if DBS had sold HN5 in an irresponsible manner to make money, how seriously could they be taken when they are now in a damage control mode. The basis for such comments arises from bruising encounters customers have had with DBS’s Investor Care personnel in interview sessions where sometimes three to four staffers question a lone customer.
Others felt that DBS in referring Relationship Managers to the Monetary Authority of Singapore (MAS) is missing an important point - in the words of one DBS customer, “If the RM doesn’t know what he is doing, if he is set impossible targets, and if he is rewarded based on commissions, whose fault is it? DBS must teach RMs first”.
12. HNIG is a group of DBS High Notes (HN) investors that has been formed to communicate with DBS and undertake relevant collective actions where and when necessary.
13. HNIG currently has about 300 investors in our contact list and these consist of investors of various HNs. More joined during the dialogue sessions yesterday. HNIG handed out leaflets to request HN investors to turn up at 4.30pm on Saturday 1 November 2008 at Hong Lim Park (Clarke Quay MRT station).
14. For any clarifications, please contact Our blog can be found at

Breaking News : HK govt to sue banks over minibonds.

"....the government has promised that it will give us unlimited financial support once we have identified cases with good grounds" - Hong Kong's Consumer Council

Hong Kong watchdog may sue banks over Lehman minibond sales
31 October 2008 1343 hrs
HONG KONG - Hong Kong's Consumer Council said Friday it was considering suing banks which allegedly mis-sold minibonds backed by failed US investment bank Lehman Brothers as risk-free investments. The 50 cases the council was considering backing mostly concerned vulnerable elderly people who said their banks had not fully explained to them the risks involved when selling them the minibonds, a spokeswoman for the council said. The complainants in the cases, which involved 14 banks, had invested between 100,000 and two million Hong Kong dollars in the controversial financial products. "We will continue our vetting to identify representative cases for legal action," the spokeswoman told AFP. "We now have 16 million dollars in our legal action fund. But the government has promised that it will give us unlimited financial support once we have identified cases with good grounds," she said. Johannes Chan, chairman of the council's legal action fund, told the South China Morning Post that their focus on elderly and poorly educated investors would give them a higher chance of success in court. "It's easier to establish that their trust has been abused or that they have been misled than (to make the same case for), say, someone who has a university education and has invested for years." Despite their name, the minibonds are complex financial products linked to a bundle of derivatives backed by Lehman, and their value plummeted after the investment bank collapsed in September. The council said in a statement that it had received 3,638 complaints and 1,388 enquiries from investors. Meanwhile, more than 100 investors protested outside the Hong Kong Monetary Authority, the city's de facto central bank, before marching to individual banks to demand a full refund of their investment Friday morning. Individual banks, including the Bank of China (Hong Kong), have started to negotiate compensation deals with customers. But many of the cases remained left out as gathering evidence to prove mis-selling could be difficult. All the banks have agreed to adopt a government proposal for them to buy back the products from customers at their current market value but the move failed to pacify investors who said they would only get back a portion of their investment. - AFP

Show support tomorrow!

Dear Singaporeans,

If ever there was a time to show some support for your fellow Singaporeans, the time is now. You may have been smart or just lucky to have avoided those toxic structured products but many fellow Singaporeans were not so fortunate. Many lost their lifesavings and the least we can do is turn up tomorrow at Hong Lim and give them some support.

Our govt has gone for a case-by-case approach which simply puts individuals through tremendous stress and unnecessary pain. You can view what these investors have been put through because of the things our authorities refuse to do what is necessary to uncover the truth and pursue justice:

Surely the chances of fair settlement will be higher if direct investigation is conducted on the selling of these products - selling process in the banks, RM training and instructions, and what the banks knew about the underlying risks in these products - to gather evidence of mis-selling. An individual filing a complaint has only his word against the bank and that makes it very easy for the bank and FIDReC to turn down his claims for compensation. All the investors are asking for is truth and justice....they deserve no less.
From Tan Kin Lian's Blog
SPEAKER'S CORNER Saturday 1 November 2008
Time: 5 - 7 pm Nearest MRT station: Clarke Quay (NE Line)Agenda:
1. Update on Petition #4
2. Help to complete complaint form
3. Dialogue with senior management of distributor
4. Collective legal action (as a last resort)
5. Meeting of investors (according to distributor)6. Translation into Mandarin.

Ask your friends and family to attend. Let us aim for a large gathering!

PAP Town Councils bought minibonds....

" There's definitely no fear that any of the PAP town councils' sinking funds will be wiped out"- Dr. Teo Ho Pin
"Sir, why don't you just tell us how much you lost instead of beating around the bush"
- Lucky Tan
If Chiam See Tong had invested a single cent of the Potong Pasir sinking fund in minibonds, he would have been called irresponsible and careless The Straits Times would be dispensing lessons on why voting for the opposition is unwise. Luckily, the town councils that lost money in minibonds were all from PAP GRCs[Link] so we are spared these lessons and we should be able move on because it is only a small matter.
The town councils have been increasing conservancy charges year after year telling us that costs have risen. However, what really happened is that the sinking funds have been rising to such levels that PAP town councils get to play fund managers. I guess old habits die hard. The PAP has never felt good unless it is sitting on busloads of citizens' money - when it comes govt reserves they have to build one far larger than what is necessary even as its citizens find it hard to make ends meet as they are squeezed to contribute to the govt's coffers. So what do they do when we have such a huge pile of money around - invest like fund managers. For Temasek, we have Ho Ching who is the best in the land for the job and coincidentally the wife of our current Prime Minister. The PAP guys, they are always so humble about their fund management skills they don't really tell us what they do with the money. We occasionally hear of the highlights of their achievements such as investing in troubled western banks and regional telcos such as the one owned by Thaksin. We have been told that these funds are needed so that they can be used to help Singapore(eans?) in times of crisis. However, a large part of it is invested in stocks and real estate that will be badly hit during how is it going to help Singapore when the funds themselves will incur heavy losses?
Town councils are just mini-versions of the Singapore govt. The sinking fund is meant to provide maintenance for the housing estates with some buffer for emergencies. They are not meant to be so big that the town councils don't know what to do and put them risky assets such as stocks and minibonds. Many families struggle to make ends meet and for many paying the conservancy charges can mean depriving the family of better food and clothing. From govt to town councils, the PAP squeezing just never ends.

Thursday, October 30, 2008

Minibonds..and finally a few words from PM Lee....

"It cannot be that I invested and it turned out well, then I'm happy, but if I invested and it turned out badly, then I am entitled to compensation" - PM Lee
"Sir, nobody is asking for compensation simply because it turned out bad. They are asking for compensation because of mis-selling" - Lucky Tan
"Treasury markets have also stayed buoyant, as Singapore remains one of the established leading global FX trading centres. The creation and hedging of structured products have boosted turnover in derivative markets. Singapore now ranks 6th globally, in OTC FX and interest rate derivatives"
- PM Lee, 2004 Speech on Liberalisation of Financial
PM Lee's interview with the Straits Times can be found here. You should read it thoroughly.
When Low Thia Kiang asked in parliament if the financial sector liberalisation resulted in a lack of regulation that allowed these products to enter Singapore and be sold to retail investors, he did not really get an answer from Lim Hng Kiang. If you want to know the answer, it is YES. In his interview with the Straits Times published yesterday, PM Lee reiterated his view that it is basically "Caveat emptor" ..." government should not be making decisions for individuals". His view is there is no need for more regulation for these structured products and it was okay that they were allowed into Singapore and that there is no need for further regulation is necessary to control these products. If you recall, many of these structured products were linked to CDS and CDOs the type of derivatives that caused the current financial meltdown - collapsing stock markets, severe recession, credit crunch, near collapse of the financial system and hundreds of billions of tax payers money around the world to bailout the system. Here we have the Prime Minister saying that there is no need to regulate these products that almost caused the collapse of the financial system and wiped out the lifesavings of thousands of Singaporeans. I wonder how high is his ivory tower is to give a view like that!? It took the HK govt a few days to realise they have blundered and that regulation has to be tightened to further protect investors [Link]. Many countries have regulation that prevented the minibonds from entering their market. Even Malaysian regulators managed to sieve out these products preventing them from causing harm to Malaysians. It is not hindsight to realise that these products were bad...
It took PM Lee one whole month to say something about this matter and what he said was simply disappointing. Again what we see is denial, 'do nothingness', 'can't do better' ....and for that we paid the this govt the highest salary in the world.

Wednesday, October 29, 2008

DOW surges 890pts - rally from the bottom?

Late last week I called a bottom on the markets:

Why there could be a bottom in the market for the market today, tomorrow or Friday.

Is this the near term bottom?

This is IT!! US market set for a BLOODBATH!!!

I thought last Friday would the bottom for the DOW. However, there was some "leftover" selling in closing minutes of trading on Monday. While thre will be plenty of explanations for the rally - credit crunch easing, economy not that bad, interest rate cuts, bargain hunting etc. my take they don't pinpoint the real reason for the rally. I have explained that the major reason for the selloff was the loss cause by the collapse of Lehman. Lehman resulted in a "black hole" of about $200B and that causes funds and banks to sell hundreds of billions in assets around the world to raise cash. Jim Jubak explained that most of these losses will become clear on 24 Oct 2008 (it was Jim Jubak who pinpointed this date, not me) as derivatives related to Lehman Bros expire...... that wouldl cause the selloff to abate and a major rebound in the markets.

Like I said I believe this bottom is "near-term" (about a 1 month rally or less?). Markets will probably weaken once the economic numbers show we are headed for a severe recession.

Las Vegas Sands falls into quicksand!

When a stock falls from $50 to $5 losing 90% of its value in one month, it tells you the company is not going to do very well.....and the recession has just started. LVS (Las Vegas Sands) has incurred such a huge debt building casinos in Macau, Las Vegas and Singapore that it won't be able to cover interest on its debt. With the economy slowing, its financial situation can only get worse.

Many Singaporeans signed the petition against the building of casinos in Singapore but were not able to stop it from coming. Looks like the recession will do the job for you. The casinos were ill-timed with so many countries jumping onto the bandwagon at the same time - Macau, Thailand, Phillipines, Vietnam etc it was doomed to failure. I just hope that the govt does not break its promise to restrict Singaporeans entering the casino if family members object. The govt decided to allow the building of casinos citing job creation as one of the reasons. However, jobs were never the problem - we havs so many jobs we need to bring in so many foreigners to fill them. It is the high cost of living that makes it difficult for the lower income breadwinner to support a family is the real problem. Casino jobs will be similar to those jobs created in Macau. Macau residents who protested against the govt because they did not benefit at all from the casino boom. The casino would have brought with it social ills without the intended benefits

Tuesday, October 28, 2008


Goh Meng Seng has posted a "complete" explanation of what these minibonds are : [Link].
I read some of the comments on the Internet that asked "who would know that Lehman will collapse & cause these minibonds to become nearly worthless"..."it is something unforeseeable by the banks who sold these minibonds". Not true!

These "minibonds" were basically bad products to begin with. Many think the risk is limited to credit events involving 6 reference entities + Lehman - this is an underestimation of the risk. The minibonds credit events in addition to the 6 reference entities + Lehman includes the following:

  • If more than 11 companies of the 150 companies listed in the Collateral Assets failed.
  • 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).

What Lehman Brothers did was to park a basket of CDOs (now better known as financial junk) and insured it with money from minibond investors. They then added more risk by adding the 6 reference entities. Even if Lehman did not collapse, the basket of CDOs were already rotting - losing more than 70% of its value. I've said getting a new swap counterparty to replace Lehman may not help investors much given the collateral assets consist of a lot of "junk".

There is little doubt looking at the structure that this is a horrible toxic product. It is simply not fit for investment. Investors deserve their money back - this product is simply defective from the start. You buy a TV that does not work, you return it and get your money back or a TV that works.

Banks have mis-sold this product by the act of selling this unfit defective products to retail investors.

Monday, October 27, 2008

Why all DBS HN5 investors should be fully compensated!

In today's New Paper, Dr. Money did a preliminary analysis of the the DBS HN5 product using data from the prospectus. This analysis showed that by design the DBS HN5 has about 8% chance of becoming worthless. The article on page 24 is entitled "Hidden risks in prospectus".

A product with such a high risk sold marketed to risk adverse investors as a low risk product must have been wildly profitable for DBS. How much did DBS take in through markups in initial pricing, early surrender charges, market making margins, initial commissions and management fees? These are important questions to ask because it will tell us if DBS passed on a disproportionate amount of risks to customers in exchange for high profit margins. If the risk of imploding like was about 8% as computed by Dr. Money, this is clearly a toxic product - in no way fit for consumption.

There is no need for the customers to prove mis-selling - as long as they were not told that there was an 8% chance of product failing, they deserve compensation. That proof is self-evident, who would ever invest in a product knowing that there is an 8% chance of losing everything for a few miserable extra % over fixed deposit?

Looking at what has already surfaced, there is already enough to justify a direct investigation by MAS. Asking the investors to go one by one to the banks to file their complaints instead of a collective action or a proactive approach by the authorities to uncover the facts puts ordinary citizens at a great disadvantage...not to mention unnecessary stress of getting the run around by the banks. Surely when 10,000 people lost a large part of their life savings, there must be interest on the part of the authorities to find out the truth...the whole truth?....Did we not pay our govt enough to do something so clearly necessary that the HK govt took only 2 days to decide to do?

Saturday, October 25, 2008

What it is like to go back to the banks.....

Unlike the HKMA which will take the complaints from investors directly and conduct its own investigation, the MAS has asked investors to go to the banks individually to file their complaints. This is what investors typically go through:

As if it is not painful enough for these people who have lost their lifesavings, MAS made them back to the banks who sold them these products and go through the additional stress. Lets not forget that the regulators in many countries did not allow these products to enter their countries that is why it was sold mainly in Singapore and Hong Kong. Yet MAS has taken no responsibility in the whole fiasco, we only hear this denial:

"'So MAS has never said that these are risk-free products or low-risk products or safe products"- Minister Lim Hng Kiang.

The HKMA has already been made to face up to their mistake of allowing banks to sell these risky products[another link]. They have taken the initiative to help investors as much as they can by setting up a complaints center and to conduct direct investigation into mis-selling. MAS was asleep at the wheel when they allowed these products to be sold in Singapore, they then denied responsibility for the mess, initially distancing themselves then reactively taking action as the protest grew. We are told we have world class govt that has to be paid millions ....please judge for yourself if the performance of this govt is in anyway world class and whether the govt and authorities acted in the best interest of the ordinary people.

What will happen to our IRs/Casinos....?

Remember the petition by Singaporeans against the building of the IRs? Remember the many voices urging the govt not to go ahead and jump onto casino the bandwagon. Even before our casinos are built the casino business has gone into a long term slump. There are plans to build casinos in Phillipines, Thailand and more casinos in Macau.
Sands is now in financial distress as it is unable to borrow money for its expansion. Its revenue is falling and there is a real risk that it won't be able to service its debts if the economic slump worsens.

I remember many people talking about our govt move to "join the casino party" so late as being a wrong one. The decision was made at the height of the casino bubble similar to our govt decision to sling cash into silicon valley at the height of the bubble in March 2000.

0158 GMT [Dow Jones] Singapore banks at risk of credit losses from funding Marina Bay casino-resort as operator Las Vegas Sands under financial distress, says UOB KayHian. Notes U.S. gaming group''s US$8.8 million loss in 2Q08, with debt/equity ratio at 3.9X while interest cover at only 0.83X, share price down 88.3% year-to-date. All 3 Singapore banks among total of 19 lenders involved in S$5.4 billion credit facility for casino-resort, with all 3 acting as lead arrangers. "We understand they are still holding the bulk of term loans allocated. The only exception could be UOB as it participated through UOB Asia, its investment banking arm." Says UOB could have distributed portion of its term loans to some other foreign banks. Downgrades OCBC (O39.SG) to Hold from Buy, cuts target price to S$6.55 from S$9.80. OCBC off 4.9% at S$5.61, DBS (D05.SG) off 6.9% at S$10.80, UOB (U11.SG) off 4.8% at S$13.82. (FKH)

Friday, October 24, 2008

This is IT!! US market set for a BLOODBATH!!!

A few days ago I posted that the bottom will be one of 3 days - Wed, Thursday or Friday. Everything seems to be coming together - the selling is going to climax on Wall Street tonight. In my post I said that I observed the the STI has been leading the DOW - on Thursday the DOW actually closed positive, but the STI began selling down today ...indeed it is leading to a bloodbath on Wall Street. There was a sharp drop in the US$/Yen rate this afternoon which indicates a massive unwinding of the Yen carry trade - probably the final unwinding of the carry trade.

"I would like to see a day when the DOW opens down by 800-1000pts and then rebound that will be the bottom " - Art Cashin, UBS Floor Trading Head NYSE.

Today the DOW Futures & the S&P Futures has hit limit down and halted from trading. There will be tremendous selling pressure when the market opens. Like I said in my post this selling is due to redemptions related in part to the collapse of Lehman Brothers - it is not due to any rational thinking or considerations.

I've prepared a lot of coffee to stay awake to watch the fireworks. There is this theory that there is a lot of money on the sidelines waiting to buy when the price is right. This market will crash and draw out this money from the sidelines and cause a rebound?....Lets see!!!!

Tonight is the night. I'm sure it will be a historic day on the financial markets.

Is this the 'near-term' bottom?

FURTHER UPDATE: US Market is headed for a BLOODBATH. This is it - either it capitulates by hitting bottom and rebounding or it goes down and stay down.

UPDATE: I went shopping came back at 5pm and saw that the Yen has gain 4% against the US$. The Sing$ has sunk to 1.507 per US$. UK has sunk into recession. The Nikkei collapsed 10%. The HSI fell 8.3% and the STI fell by 8.6%. In my earlier post, I said bottom could be one of these 3 days from Wed to Friday. This looks like BLACK FRIDAY by all accounts. Someone said the bottom will be a day when the DOW open and plunge into the abyss then recover to close positive. Based on Dow futures (now -430pts), the DOW is set to open and plunge into the abyss....whether it will close +ve remains to be seen. Like I said all this is for fun, I hope everyone is still alright and watching with interest.

The time now is 12noon 24 Oct 2008. The STI is 1,660.19 ( -85.48). the bottom??? least in the near term?

It certainly feels like a bottom -the hopelessness, the despondency and fear.

They say nobody rings a bell at the bottom....I didn't hear any bells ringing...did you?

CDS - Weapons of financial mass destruction....

The banks' move to compensate vulnerable investors first after they were urged by MAS to "do the right thing" has a few strings attached. Vulnerable investors will be asked to sign a statement to say that they will not participate in any lawsuits against the banks for mis-selling. The existence of vulnerable investors is the best evidence that widespread mis-selling has occurred. Divide and conquer. The best way not to pay everyone fully is to pay some people first - the vulnerable investors are called "deserving investors" in various press release. So what does that make the rest of the investors? Drag the compensation process, case by case, by then the protests would have died down - with the old aunties compensated, the sympathy of the public would wane and the govt will try to move on. Like I said in my earlier posting, our victims are lucky that the same product was sold in Hong Kong. There will be some pressure to apply resolution is arrived at in Hong Kong - if they compensate everyone there, hopefully everyone here is compensated. The Hong Kong govt has taken a hardball approach against the banks with investigations, threats of sanctions etc they have pledge to do everything they can to bring justice to the victims. I've heard no such pledge from Lim Hng Kiang - just this denial of responsibility:

'So MAS has never said that these are risk-free products or low-risk products or safe products"- Minister Lim Hng Kiang
Buffett once said that CDS (Credit Default Swap) were weapons of mass destruction. By now everyone who has been monitoring this crisis would know what a CDS is. A CDS is an insurance that one can buy in case a company defaults on its debt. You lend $1M to company A by buying its bonds but you are afraid that company A might collapse. So you go to an insurer, Company B, to buy a CDS that pays you in full if company A collapses. The problem with CDS is that you don't have to own the bonds to buy the insurance. What happened is that many hedge funds and individuals who want to bet that company A might collapse can go to Company B to buy insurance. Company A might have issued $100M of bonds but because the CDS market is unregulated, Company B might end up selling insurance for $1B worth of company A's debt i.e. through CDS, debt that does not exist is insured. Now if company A collapses, company B has to pay $1B to the purchasers of CDS. Right now CDS have been sold to insure $62T (yes trillions) worth of debt - that is more debt than the sum total of the corporate bonds and US govt debt. Company B itself might have debt that is insured by company C. If company A collapses, it might cause B to collapse because it sold so much CDS ...and if B collapses, C might collapse. ...then we have CONTAGION.
There are other effects of CDS and some of it is linked to the falls in the stock market:
  • Short sellers short the bonds and stocks of a company.
  • They then buy CDS - pushing up the price of the CDS for the company.
  • CDS price is used by banks and investors as an indicator of credit worthiness so when the CDS (insurance premium) goes up, the company is perceived as risky. They will sell the bonds & stocks of the company to trim their exposure. This causes the stocks price to drop. Falling stock price can cause rating agencies to downgrade the company causing further drops.
  • The short seller can then cover for a profit.
The most scary effects of CDS might come later as the economy weakens and companies default on their debt in large numbers. This will cause an endless wave of bankruptcies that will bring down the entire financial system. That is why Bernanke is pushing for a stimulus package to soft land the economy. This package has to be large enough to delay or spread out company that the CDS can expire. They have to step in to regulate the amount of CDS issued or prevent the issuance of new CDS.
You will know by now that the purchasers of minibonds and high notes unknowingly became sellers of CDS i.e. insurance sellers. But the damage is not limited to minibond, high notes, Pinnacle notes....many investors who purchased structured products are not even aware that there are problems with the products they own. Take the example of GE's Grandlink Choice Notes, although the number of credit events required to make these notes worthless has not occurred the price of these notes have fallen substantially because the probability of hitting that number of credit events by the time the notes mature is very high i.e. probability of becoming worthless is not low.
GreatLink Choice (Aug 2013) 0.244
GreatLink Choice (Dec 2013) 0.210
GreatLink Choice (OCT 2012) 0.280
I think investors have to be wary of any solution in the minibond & high notes fiasco that involving having them hold those notes to maturity. It seems like a good idea on the surface because right now the underlying securities of the minibonds fetch a very low price - we will know what they are worth when the Hong Kong banks are done with the valuation in a matter of days. The logic is investors may stand a better chance if they are held to maturity. Please be careful with that because they valuations may be worse if held to maturity just like those GreatLink Choice notes - I can buy them now for $0.24 when they once sold for $1 - but you think they will be worth more upon maturity? I think investors should not stop pursuing their rightful compensation due to mis-selling even when a new swap counter party is found for the Lehman Minibonds. I know Tan Kin Lian is has referred a few possible the new swap counter parties to MAS. Please think about it carefully - banks who are guilty of mis-selling are still guilty of mis-selling - those risky products are still remain risky with new counter parties. I think while everyone is trying to help, they have to be careful with the solutions. The situation is likely to become worse with the recession, holding a risky product to maturity MAY result in a worse outcome than making banks buy back at the current market price. I believe the Hong Kong govt is trying to get the market value first, then use evidence of mis-selling to force the banks to compensate fully. It is very easily to slip up and let the banks get away once the counter-party is found. I hope everyone involved in helping these investors be very careful.....otherwise the investors will lose out and the banks will go unpunished.

Wednesday, October 22, 2008

Why there COULD be a bottom for the market today or tomorrow or Friday......

UPDATE: Dow plunges 500pts, oil plunges t0 $67 per barrel. Lets see if the DOW can make a bottom by Friday 24.10.2008. I found a Jim Jubak video explaining what I was theorizing : . This short term selloff is about raising cash and redemptions rather than discounting a deflationary recession which I believe will come. In the longer term things are not so sanguine. A few months ago I highlighted the work of Nouriel Roubini in particular his "12 steps to financial disaster". To get out of this mess and break out of the 12 step there are more things the US govt must to and Roubini outlines it in this video: The global economy is pretty much doomed if govts stop here and do nothing more - they really have to jump ahead of the curve and do much much more.

First of all, just let me qualify that I'm not an analyst or a financial expert. I invest for the long term and don't recommend anyone invest for short term because it is 'usually' unpredictable. I do scan through various markets surh as gold, oil, copper etc as part of my daily routine and read voraciously about what goes on around me - that includes going through most of the business news to know what goes on in the financial markets. What I'm going to say is based on what I observe and you shouldn't act on it - it is just for fun...and for you to flame me should I be wrong about this.

Here are a few of things I noticed in the markets:

1. Our STI & Hong Kong's HSI are actually leading the DOW. ...and that includes the DOW Futures. For a number of days, I noticed that the STI fell for no apparent reason and the DOW followed. The pattern recurred and is happening too often to be coincidence. It looks like funds are collectively selling Hong Kong then Singapore then New York.

2. Commodities are falling in tandem with each other including the safe haven gold. This tells me something about the selloff. People are selling for a reason and it is not fear.

3. In markets where foreign funds are not so active due to controls such as Malaysia, the falls are much smaller.

4. The US$ is rising against everything except the Yen.

5. This pattern of selling occurred after Lehman's collapse.

I've seen the above pattern occuring almost every other day for a number of weeks. What is going on???? Many analysts cited deleveraging as the reason. However, we have had almost one whole year of deleveraging already. The best explanation and the one I agree the most with is by Jim Jubak. Remember the Friday before Lehman Brothers' collapse? AIG was looking for $20B. After Lehman's collapse, AIG needed $85B urgently. $20B---->$85B in a few days. What happened when Lehman collapsed was it left a black hole in the books of AIG and they needed to raise cash immediately to patch it up. $85B was too big and the govt had step in to give AIG more time to sell assets. But AIG was not the only company with links to Lehman. Lehman's collapse resulted in hundreds of black holes in the balance sheet of many companies, hedge funds etc in US & Japan where Lehman was most active. All of them had to sell assets and close positions in commodities, equities and foreign currencies.
Why do I think the market will find a near term bottom soon? Much of the derivatives associated with Lehman expires by this Friday. According to Jubak, the losses associated with Lehman's collapse will become clear and companies do not need to raise more cash once that happens. We can expect to see a near term bottom today or tomorrow in the DOW and Asian stock exchanges. This is a short term rally that may last for a few weeks before concerns about the recession creep in.

Tuesday, October 21, 2008

Victims of our leaders' aspirations....

If you read today's New Paper, there is a poignant story about a cancer patient who lost $190,000 in structured products (both minibond and DBS High Notes 5). The retiree now left with nothing suffers from depression and cannot afford her cancer treatment. This is only one story - there are thousands of other sad stories of victims who labored their entire life only to have their savings wiped out by structured products that imploded. If you watched the parliament sitting yesterday, there was one question left unanswered:

"Mr Low also asked if the investors’ plight was the result of a ‘less prudent regulation by the MAS’ and ‘the Government’s decision to liberalise the financial market"
- Straits Times, Be more proactive MAS.
Why were these products allowed into Singapore? Why did regulators not stop the marketing of structured products despite numerous complaints? Why were there no checks on the banks to ensure they complied with regulation in the sale of these products? For many years, our leaders wanted Singapore to be a financial hub - a place where the wealthy in the region would come to park their money. We wanted to be the Merill of the east, the Lehman of Asia, a magnet for money...we wanted to host the hedge fund managers, the investment bankers...we wanted to have a part of Wall Street's profits and our leaders admired investment bankers especially the way they were paid....and they believed that high pay would buy competence:
" have to pay the market rate or the man will up stakes and join Morgan Stanley or Lehman Brothers or Goldman Sachs" - ,MM Lee April 2007
Nevermind what Wall Street does for money...if it is money, it has to be good!! We started to educate our students to be financial engineers instead of civil engineers and wealth managers instead of people managers. For the sector to grow, new products and new services have to be introduced, regulation relaxed so that more sophisticated products can get to the market. Equity link notes, minibonds, etc guaranteed but not really guaranteed, protected but not really protected, marketed with fine prints and 100 page prospectus. Banks love them because profit margins are high. RMs love them because commissions are high. Magnificent posters designed to give complete assurance, potential returns that are almost never achieved, risks that are always obscured by complexity and payback that cannot be determined without computers and models. This thing started to grow. Initially, products were sold to high net worth individuals but there were not enough of such people and some of them were smart enough to know what the banks were up to. To keep it growing, they marketed the stuff to the retiree who just got his CPF money, that old lady who wanted only to put her money into a fixed deposit and to the people least likely to understand what the products are.
This my friend is a story of greed. None of the products are any good or brought much benefit relative to risks to the people who bought them. The banks did not do a service to the customers to earn their money. They merely passed on the risk and collected the profits. The more the risks are hidden by complexity, the higher the the profit margins and the higher the commission for those who sold them. You can go through many of these products here and find they are bad products which have been shamelessly marketed with the intent to create false expectations.
"'So MAS has never said that these are risk-free products or low-risk products or safe products"- Minister Lim Hng Kiang
There are many countries that did not allow the sale of minibonds. One of them is Malaysia which forbid the sale of the minibonds because their regulators felt that these were too complex and risky to be sold to retailers. MAS never prevented these unsafe products from being sold to retailers because with our govt aspirations to be a financial hub, our banks were allowed to jumped onto Wall Street's bandwagon selling derivatives to ordinary Singaporeans to boost their bottomline. For a while this generated growth for our financial sector - a key goal of the govt. But there is a price to be paid when greed overcomes prudence and fiduciary duty is forgotten....traded away for commissions....

Low : Be More Proactive MAS!

'The Minister's answers sound like the MAS shouting across the river, while watching a fire burning,' -Mr Low Thia Kiang
It seems like this is turning out to be a small matter - I thought SM Goh himself would appear before parliament to answer the questions as chairman of MAS but he sent his deputy Mr. Lim Hng Kiang to do the job instead. Contrast that with Hong Kong where Donald Tsang himself spoke up in the legislative council to answer every single question and pledged to seek justice for the affected investors. I guess our PM and SM had more important duties to attend and have to leave this matter for Mr. Lim to handle.

Mr. Low suggested the Government could form a committee 'to deal with the matter directly'. Directly investigate the banks to find out how the RMs are trained, what instructions were given to them to market these products and whether there are checks in place to ensure that no mis-selling take place. What MAS has done is to appoint "individuals to help review the complaints handling and resolution processes of the FIs who have sold the toxic structured products. The independent parties are to determine whether FIs' complaints handling and resolution processes are independent, fair and transparent and conducted in a timely manner"[Link]. In other words, MAS will not get its hands dirty with direct investigations. It will get data from the complaints handling process of the banks via these independent parties and then proceed with inquiries.
Given the number of "vulnerable" old folks who were targetted and mis-sold these risky products, there is enough to believe that are systemic issues with the FI that led to products being mis-sold. Such systemic issues can only be uncovered through direct investigation into the processes, internal communication and remuneration system. Instead of a case by case approach in which individuals have to negotiate their own compensation limited by their own evidence, the authorities can help establish important facts that will bring about a better resolution for many of investors.

It took the Hong Kong govt less than 2 days to decide to conduct direct investigations into mis-selling. While Mr. Low demands more "action" from the People's Action Party, the Hong Kong govt has already found evidence of mis-selling in 2 banks and are ready to punish them probably forcing them to compensate investors fully or face severe sanctions : [Link]. All the Singaporeans investors are asking for is truth and justice. The truth cannot be established if the govt does not investigate these FIs. Asking the investors to go one by one to the FIs with their complaints and to seek redress from the FIDReC with their limited evidence will reduce the chance of getting an outcome that is just. For example, UBS was forced to buy back billions worth of ARS (auction rate securities) which were mis-sold to investors in the US. This outcome is only possible because regulators stepped in to conduct direct investigations into mis-selling. If American investors where told to go to the banks one by one, they won't stand a chance.

Monday, October 20, 2008

Colin Powell supports Obama.

Until today I cannot understand how a bunch of war mongering neocons got him to do what he did at the UN. It was a moment he described as the lowest point in his life. Perhaps it was his loyalty that got the better of him. Still, many Americans trust and respect him ...and his support for Obama counts.

Here's is an extract from his testimony -"Why I'm voting for Obama".

I feel strongly about this particular point because of a picture I saw in a magazine. It was a photo essay about troops who were serving in Iraq and Afghanistan. And one picture at the tail end of this photo essay was of a mother in Arlington Cemetery. And she had her head on the headstone of her son's grave. And as the picture focused in, you could see the writing on the headstone. And it gave his awards -- Purple Heart, Bronze Star; showed that he died in Iraq; gave his date of birth, date of death. He was 20 years old. And then at the very top of the headstone, it didn't have a Christian cross. It didn't have a Star of David. It had a crescent and a star of the Islamic faith. And his name was Kareem Rashad Sultan Kahn, and he was an American. He was born in New Jersey. He was 14 years old at the time of 9/11, and he waited until he could go serve his country, and he gave his life.
Now, we have got to stop polarizing ourself in this way. And John McCain is as non-discriminatory as anyone I know. But I'm troubled about the fact that within the party we have these kinds of expressions.
So, when I look at all of this and I think back to my Army career, we've got two individuals, either one of them could be a good president. But which is the president that we need now? Which is the individual that serves the needs of the nation for the next period of time?

And I come to the conclusion that because of his ability to inspire, because of the inclusive nature of his campaign, because he is reaching out all across America, because of who he is and his rhetorical abilities -- and we have to take that into account -- as well as his substance. He has both style and substance. He has met the standard of being a successful president, being an exceptional president.

I think he is a transformational figure. He is a new generation coming into the world -- onto the world stage, onto the American stage and for that reason, I'll be voting for Senator Barack Obama.

Sunday, October 19, 2008

Umbrella says it all!!!

The same umbrella that was in this week's Sunday Times. The editor Han Fook Kwang must have thought long and hard before he published it.

Black Swans and the inherent flaws of structured products.

Some of the structured products (e.g. DBS HN5) are just down right bad even without the inherent flaws I'll be discussing.

About 2 years ago, I ordered a book from shipped from entitled "Fooled by randomness". I got interested in the book after reading a few articles by the author Prof. Telab. His theory was that a lot of the financial engineering models are flawed because of the "fat tails" that occurs in reality that is not (and cannot be) modeled in financial engineering. A fat tail probability distribution means that large movements and catastropic events occur with a far higher probability than in normal distributions used by financial engineers. Black Swan events are a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations (wiki). Because they are not modelled in financially engineered products, these products in reality carry far higher risks than what is designed. In other words, the products are flawed like bad medicine with potent side effects discovered only after they are sold to millions.

Almost all structured products sold in Singapore are linked to derivatives. Purchasers of structured products unknowingly become buyers/sellers of derivatives. I believe there is little use for these products and nobody actually needs them except those who make money selling them - the commission earners, banks etc. What do we lose getting rid of these products? Nothing really....Do you know why there are no minibonds protests in Malaysia? The Malaysian MAS took a look at these products couldn't understand them and decided not to allow these products to be sold to retailers at the banks. That decision saved thousands of Malaysians from the pain of losing their lifesavings. They do not have high flying scholars from Princeton or MIT but they have people with common sense not to allow risky complex products to be sold to ordinary citizens. That common sense saved their citizens from the suffering that 10,000 Singaporeans are experiencing right now.

SM Goh : Planned Leadership Succession make Singapore stable.

Another day, another piece of wisdom from our SM Goh. This time on how planned succession makes Singapore stable. I guess that is why USA the superpower is so unstable - 2 weeks from the presidential elections and we are not quite sure if Obama will win. Why don't they plan it like we do here in Singapore. Our plan and groom succession method gave us PM Lee who happens to be the son of MM Lee by coincidence - so after 40 years of planning and grooming, this is the great leadership we have, the best that is possible. Singapore must be a really complex country to run because other countries several hundred times our size can be governed without such "plan and groom" schemes.

"Trust, like respect, cannot be decreed. It has to be earned. It is this trust of Singaporeans in their government which has enabled us to persuade them to accept some tough, painful but necessary policies and win elections" - SM Goh
"Sir, was that why you were so busy in Hougang and Potong Pasir during the last elections telling voters they will lose out on upgrading if they don't vote PAP? I think the people trust that you will carry out your promise. " - Lucky Tan

So how does one go about selecting the next leader to groom? Selection is done by the existing PM, MM and SM to make sure the person is acceptable to the present leadership. Like what SM Goh said there will be no major policies shifts if when the person is chosen carefully. So this person is chosen to preserve existing policies which are taken to be good and ensure that little is changed in Singapore. The next part is the grooming portion - take the person through the various ministries to make sure he understands fully existing policies so that collective wisdom of the past 40 years of PAP govt sets the boundaries for which minor tweaks can take place. The last part is to market this person to the public - manufacturing great hope of a better future, great hope for change (remember the Remaking Singapore compaign?) and perhaps marketing the chosen one as some kind of marverick needed to energise the country. Of course, the marketing part is just marketing ...a few years down the road and a few crises later you discover his real leadership qualities like we are seeing in this crisis. Shackled by the ideologies of the past and past successes, he responds to change with rigidity.....

"Our attitude towards the press in Singapore is that they are partners in nation-building" - Vivian Balakrishnan

Anyone with doubts about the effectiveness of the grooming needs only to look at Vivian Balakrishnan. Here he is explaining to a Sec 3 student why defamation lawsuits are necessary in Singapore : [Link]. It is clear he has gone through some kind of spectacular transformation from a vocal critic of the PAP govt to its greatest defender - now that is the power of grooming .... assimilating marvaricks into the establishment infecting them with a kind of groupthink and then before you know it they all sing in tune.

You can imagine with 40 years of continuous rule, there are all sorts of relationships, rules, practices and constraints set for those who are part of the establishment and in power. Policy making is not a simple matter of doing what is best for the ordinary people of Singapore. "Best" is lost in a jungle of complexity, ideology and opacity. Succession planning is a strategy to maintain the status quo for as long as possible. It is the surest way to keep much needed change and political progess at bay. 40 years ago we were the freest nation in the region - Philipines was under a dictator called Marcos, Indonesia & Thailand were under military strongmen - ask yourself where these countries are relative to us politically now. SM Goh talks about trust. We will all trust a system that is fully transparent, that can be challenged freely, peacefully and vigorously with a media that relentlessly pursues the truth. There is one word for such a system : DEMOCRACY.

October 18, 2008 22:23 PM
Planned Succession Makes Leadership Transitions In Singapore Stable, Says Chok Tong
By Zakaria Abdul Wahab
SINGAPORE, Oct 18 (Bernama) -- The culture of planned political succession of prime ministers and ministers on the basis of merit has made political transitions in Singapore stable, orderly and predictable, Senior Minister Goh Chok Tong said Saturday.
He said Singapore had been systematically identifying good men and women with the character, values, drive, motivation and commitment to stand for elections and lead the republic.
This was what distinguished Singapore from other countries, he said after being conferred the University of Pretorias honorary doctorate in business administration at the National University of Singapore, here.
"This is a valuable competitive asset because investors know that government policies will not lurch from right to left, both in the literal and political sense," he said.
Goh also said that Singapore had built up strong institutions to implement public policies effectively, namely the judiciary, the civil service, the police and the media, and the latest was the non-government organisations sector.
The former Singapore prime minister said the efficiency of the bureaucracy alone was not enough to run the government.
He said what was more important was integrity of political leaders, public officials and the value system of the country.
"The tragedy of many developing countries is the curse of corruption coursing through the veins of government and society," Goh said.
He said building trust with the people was absolutely important as the best policies could fail if the people could not accept them or if they distrusted the intentions of the government.
It was best to be upfront with the people, especially if the government were introducing policies which caused pain in the short term but were necessary in the long term, he added.
"Trust, like respect, cannot be decreed. It has to be earned. It is this trust of Singaporeans in their government which has enabled us to persuade them to accept some tough, painful but necessary policies and win elections," Goh said.

Saturday, October 18, 2008

Structured Products : List of questions for Parliament

Monday's parliament sitting will discuss the current crisis and structured products.
SM Goh is the man who will answer the questions . ...I hope for his own sake he does not utter those 2 words "that's life" otherwise this will be as well remembered as his wife's p-word.
Yesterday's statement from MAS urging the "banks to do the right thing" marks a turning point for ths govt on this issue. They have already laid down expectations for the banks to compensate those who are vulnerable and clearly been mis-sold these products. They must have realised that this matter has to be handled with greater urgency given the petition, turnout at Hong Lim and of course the actions of the Hong Kong govt.

The investors only want 2 things - they want the truth to be established and justice to be done at the end of the day. For the truth to emerge, banks have to be investigated and MPs are asking if the MAS plans to do this and what is the exact nature of such a probe. Once the truth is established justice will follow.

I'm sure SM Goh will be quite careful with his answers. Given the initial govt response on this matter has been highly reactive, I think they understand it is time to jump ahead of the curve and show leadership. This is the People's Action Party - they act in the best interests of the people...and the people now want some action. Action please!

Dr Lily Neo:

(a) to what extent are Singaporeans affected by the collapse of American financial institutions such as Lehman Brothers;
(b) how many Singaporeans are losing their savings as a resultof this crisis; and
(c) what are the safeguards, if any, to protect Singaporeans' savings in financial institutions and insurance companiesfrom similar financial turmoil.
Mdm Halimah Yacob: To ask the Senior Minister
(a) how does theMonetary Authority of Singapore (MAS) supervise financial institutions operating in Singapore to ensure that they fully comply with the regulatory framework requiring disclosures and proper business conduct when they market investment products to retail investors;
(b) whether the existing laws and regulations are adequate to protect retail investors against suchhigh-risk investment products;
(c) whether MAS will be initiating any investigations into the conduct of financial institutions to ensure that theyhave conducted themselves appropriately when marketing and selling toretail investors; and
(d) what more can be done to enhance safeguards forthese investors.
Mdm Cynthia Phua: To ask the Senior Minister
(a) how does the MonetaryAuthority of Singapore (MAS)
  • (i) safeguard the interest of the man-in-the street to ensure that they are aware of the complexity and high risk natureof the financial products they are investing in; and
  • (ii) regulate banks and finance companies in the sale of high-risk and complex structured financial instruments so as to safeguard the capital sum invested by the man-in-the-street;

(b) whether MAS will be able to provide the number ofSingaporeans who lost their high-risk investments following the closure of the Lehman Brothers in the US; and

(c) whether MAS will require banks to determine the risk tolerance and ensure that the contracted terms and conditions are understood by potential investors before the sale of suchproducts.

Mr Low Thia Khiang: To ask the Senior Minister

(a) whether the MonetaryAuthority of Singapore (MAS) will investigate how structured products linked to Lehman Brothers were marketed; and

(b) if there is any misrepresentation, whether MAS will assist the affected investors in negotiating with the banks to ensure fair treatment for these investors.

Er Lee Bee Wah: To ask the Senior Minister

(a) what are the terms of reference for the three independent consultants appointed by the financia linstitutions to look into the investors' complaints;

(b) what are the procedures to ensure that future investors are not misinformed about highrisk financial products; and

(c) whether he is able to provide the information on how many of those who invested in these structured products linked to Lehman Brothers were elderly people or retirees.

Mr Siew Kum Hong: in view of the public concerns on the sale of structured products

(a) what are the principles followed by the Monetary Authority of Singapore (MAS) in regulating financial institutions;

(b) whether MAS is investigating the allegations thatfinancial institutions have misrepresented and missold structured productsto the public and, if so, what is the status of such investigations; and

(c) why did MAS not appoint the three individuals reviewing certain financial institutions’ internal processes, instead of leaving them to be appointed bythe financial institutions and thereby permitting possible perceptions ofconflicts of interests.

Mr Gautam Banerjee: To ask the Senior Minister whether more can be done to

(i) improve the level of communication and disclosure particularly on credit and market risk when complicated structured investment productsare sold to ordinary investors; and

(ii) provide comprehensive product and ethics training to those marketing complicated structured products to retail investors.

Mis-selling : Burden of proof.

I'm sure many superscale public servants worked the statement read by Heng Swee Keat. The basic strategy outlined in the statement on the issue:

  • Investors should go to banks or FIDReC to resolve their complaints case by case.
  • If any findings show that banks have violated regulation, MAS will act.
  • MAS now confirms it is conducting formal inquiries on whether laws are broken.

In his statement, he also highlighted "vulnerable investors" - the old and uneducated. It is obvious that there is mis-selling if a 75 yr old who has been sold a product with a 5 year maturity. He also urged the banks not to be too legalistic in its dealings with customers - meaning the banks cannot just sell you anything because they persuaded you to sign on the document.

The MAS statement left a whole slew of unanswered questions. What happens if the investor is a 30 year old university graduate? Does that mean there is no mis-selling because he ought to be able to understand the product? How does one go about proving mis-selling?

It is messy to go for a case-by-case approach to sieve out who was mis-sold and who wasn't. Also, the burden of proof shifts to the individual - his words against the bank. I believe such an approach is unnecessary and time consuming if it can be proven that the system the banks put in place to sell these products is likely to result in mis-selling:

1. Incentive scheme for RMs. Were they given more incentives in terms of commissions to sell products with higher margins? If they were, it completely undermines the need to sell products best suited for the customer. Were there quotas? Were quotas linked to promotion and firing?

2. Training. Were the RMs given enough training for the products? What is the training material like and are there sales pitches/scripts used? If the training material does not highlight the risks to the RMs, it is unlikely they could have explained it to the customers and mis-selling is likely. If there is some script or instructions used in the selling of these products, these can be examined to see what evidence for mis-selling can be found.

3. Product Complexity. What margins were the banks making from these products? What is the relationship between the bank and the counterparties? What were the fees/commissions made by the bank in the selling of these products? They were sold to investors for a return of 5% a year and had maturity of 5 years. What was the real underlying returns? The answer to this will tell us if they banks have hidden the risks to make high margins on the product giving the investors a false impression of very low risks because of the low returns.

Direct investigations will throw up answers for the above questions and may help to resolve the issue without a case-by-case approach. How is an investor going to proof what he was told or not told when he was sold the product? How is he going to negotiate for a fair compensation? Individual complaints will not shed light on the whole selling process from the creation of the product, training, sales incentives, marketing etc. If there is mis-selling to vulnerable investors, there has to be a system behind that to push the RMs to make such sales. If there is such a system, there is no need for individual investors to fight own case.

Friday, October 17, 2008

BREAKING NEWS : Buffett - Now is the time to buy!

Buffett's Opinion Piece here

As an investor, I've never seen stocks so cheap. Not during the Asian Crisis, not during SARS. I've been investing my money in stocks since my NS days....that is a few decades of watching numbers such as price to book, price earnings ratios and price to cash. Stocks are the cheapest since I started investing by all measures of value. There is nothing like what we have seen in recent weeks - nothing comes close. It is like having successive bouts of 9/11 in the financial markets week after week.
There are a number of reasons why they are so cheap:
1. The coming recession is expect to be deep and serious.
2. The credit crunch might cause some companies to go bust especially those dependent on short term financing.
3. Large large doses of fear ...immense fear...
Buying stocks because they are cheap may is no guarantee of success because things can get worse and worse ....earnings can fall, assets can fall in value, cash can dry up and companies can go bust. There is no doubt that a recession is on the way and the economy will get worse before it gets better.

It is really really hard to pick the bottom. The bottom may be far far away. There is nothing like this market and even for someone as old as Buffett, it is probably the first time he has seen what happened in the market in the past 3 weeks.
Here are some of my thoughts on the market:

1. Buffett is applying an old adage to "buy when others are fearful". The VIX index is a measure of fear in the market hit a historic high yesterday. There was fear. The highest level of fear ever in the history of the VIX.

2. Perhaps the market will go lower and do a "Japan". The Japanese stock market hit a high of 33,000 20 years ago and never recovered. Maybe the market will drop by 70% from the peak. It is now only 50% from the peak. There are things we will never know and this is one of them.

3. Investors ask : Shouldn't we wait for a bottom to form before we invest? Actually, you can't tell if a bottom has been formed. You can wait for the market to rally 5% or 10% from a "bottom" before going in but the 5% or 10% might be the tail end of a market move.

4. Don't buy stocks when we just entered a recession? Actually the bottom or opportunities to buy relative to the timing of a recession is not clear. Markets can bottom before a recession or during a recession. If my memory serves me right, stocks have their heaviest drops before recessions and slide down slower or go sideways during recessions.

5. To wait or not to wait? The million dollar question.
Timing the market is tricky business. One also should be wary of catching falling knives. Some people would buy because Buffett bought and he has not been too far off any bottom in the past.

Also, is there a bottom in this crisis in the first place? The economy may be so damaged, we go into an L-shaped decline ...we go down and stay down for the next 5 years. It is indeed hard to be optimistic. I've been through numerous recessions. There has never been one that I didn't think we will get out of in decent time. .....that is until this crisis....there a real possibility that the global economy stay down after the knockout punch. I don't know for sure.
I'm buying stocks in batches because there is no way to time the market. All I know is stocks are trading at historic low valuations - the only reason for Warren Buffett to buy. There is of course the possibility of things getting much worse....that is a risk that cannot be eliminated....a risk that value investors have to take because once it is clear that things are getting better, the bargains will disappear fast.
Warren Buffett Says Now Is the Right Time to Buy U.S. Equities
By Alan Purkiss

Oct. 17 (Bloomberg) -- Warren Buffett said he's buying U.S. stocks and, if prices stay attractive, his personal investments, as distinct from his stake in Berkshire Hathaway Inc., will soon be wholly in American equities.
Writing in the New York Times, he said he's following the principle: be fearful when others are greedy, and greedy when others are fearful.
Exaggerated concern about the long-term prosperity of the many sound U.S. companies is foolish, and most will probably be setting profit records in years to come, Buffett said.
While short-term stock-market movements can't be foretold, the likelihood is that the market will recover before the economy or general investor sentiment do so, and ``if you wait for the robins, spring will be over,'' he said.
Referring to the 1930s depression, Buffett pointed out that the Dow reached its nadir on July 8, 1932; economic conditions continued to deteriorate until Franklin Roosevelt became president in March, 1933, but by that time the market had climbed 30 percent.
Bad news, Buffett concluded, is an investor's best friend, for it enables you to buy ``a slice of America's future at a marked-down price.'' Last Updated: October 17, 2008 05:21 EDT

Minibonds : No leadership in times of trouble....!

I tell you why Singapore minibond investors are lucky. They are lucky that the product was also sold in Hong Kong and Taiwan where the people are empowered to seek justice, pressure their leaders to do what is right and demand action from the authorities by protesting. I'm quite sure that the minibond investors there will eventually receive what is rightfully theirs....and the Singapore banks and authorities will be compelled to give investors the same resolution otherwise it will be too embarassing for Singapore as financial hub to continue its business.
"If the regulator finds evidence a bank that sold the Lehman products didn't have procedures in place that could prevent abuses, that could be enough to impose penalties, Mr. Steward said. It wouldn't be necessary, in other words, to process each complaint from potentially thousands of investors individually -- a process that could take years" - Wall Street Journal on the probe by HK authorities.
Hong Kong Chief Executive Donald Tsang demand answers from banks by this week on whether they will buy back the Lehman minibonds : [Link]. His message to the bank is stern - I think he will be twisting their arms for a quick and fair resolution.
Lets recap how the MAS handled the situation. The initial reaction from the MAS was to ask the investors to go back to the banks individually if they had complaints[Link]. This is the sure way to get the worse deal for investors and someone wrote on the one of the forums that the MAS was asking for the investors to "be divided and conquered". MAS then met up with the banks and hammered a deal to have the banks appoint their own independent investigators. All this was done without first meeting investors to discuss how best to help them. It was Tan Kin Lian who saw the importance of getting investors organised - petition, protest at Hong Lim, seeing MPs in groups and preparing affidavits. He said that if one person said that he was missold he may be ignored but if one thousand people swear they were missold these products it is a powerful statement. Among the 1st words from our govt on the issue was a remark from SM Goh Chok Tong telling the investors ".... that's life, if you want good rewards, you have to take risks. Otherwise, leave your money with the CPF". Singaporeans are to accept injustice as that is part of life in Singapore?
There are about 10,000 investors who lost money in these structured products. Many lost their entire lifesavings. Many felt cheated. Many desperate for help. If ever leadership is needed in govt this is the moment....a moment of crisis and pain for so many Singaporeans. Anxious Singaporean investors needed to do something for themselves and understand the best way forward. There was clearly a need for collective action and leadership to organise such an action. There was leadership but not from the men and women who are paid millions for their services. It was Tan Kin Lian and the many ordinary Singaporeans who step forward to help. They did it not for money but for justice and their fellow Singaporeans.
By the end of this week or next, the leaders in Hong Kong will wrap up this problem. Our best paid govt in the world will have to take direction from Hong Kong.

Wednesday, October 15, 2008

CPF the ultimate structured product.....

Oh my...if Lim Swee Say ever retires from his minister job, he will definitely be able to find a job as an RM selling interesting products at the bank. His Singlish is really an big advantage ...who ever listens to him can only trust that he knows what he is talking about.

"Every month when I get my CPF statement, I feel so rich...." - Lim Swee Say.

"Sir, you don't need your CPF to feel rich. All you need to do is peek into your bank account"- Lucky Tan.

CPF : -

Return : 2.5%.

Capital Guaranteed : Yes.

Early Withdrawal Penalty : Your Singapore citizenship

Reference Entity: GIC.

Maturity : 65 years of age and rising.

Your CPF money is loaned to GIC at an interest of 2.5%. GIC invests this money around the world and recently they took a liking to western banks. Your money is safe as long as GIC is safe. GIC is safe as long as its investments are safe. GIC's investments are safe as long as there is no once in a century global meltdown that causes securities to plunge in value. I guess Lim Swee Say is smiling because there is no such thing as a monthly CPF statement and he probably doesn't know how much he has in his CPF because it is pocket change for a person with his salary. He makes in 2 months ($300K?) what many Singaporeans take a lifetime to accumulate in their CPF.

Recession is here and Minister Lim who is also NTUC chief will soon be very busy telling workers that times are hard and sacrifices will be needed to keep our economy afloat. Cutting employers' CPF contribution is always an option to save the economy.....I hope when that time comes he remembers what he said about the CPF.

Tuesday, October 14, 2008

No protest please, we're Singaporeans.

A group of DBS High Notes holders planned to organise a sit in at DBS' Shenton Way office. They have been warned by the police that it is against the law and action will be taken against them if they went ahead with it. Well, I thought mis-selling was also against the law...but nevermind...more on that later. What is legal in Hong Kong which is now under the rule of communist China is illegal in Singapore......20% electricity tariff hike, you just have to swallow it, lost your lifesavings, you just have to accept it. We are living in Singapore a lawful, orderly country where citizens are expected to obey the law, wait patiently for things to be to be done for them and trust that those in authority will act in their best interest. If you want to protest, it has be in Hong Lim where it is contained and orderly ....and does not put the authorities under undue pressure to do something to help. The old argument that protests will cause foreign investors to flee, doesn't seem hold anymore because those investors come from countries where protests are held frequently and nobody seems to be fleeing from Hong Kong....and nobody is investing in N. Korea where there are no protests.

There is no need for protests IF govt responds to this issue with urgency and genuine empathy. If the authorities acted with much more sense of urgency, with the assurance that justice will be done, I think everyone would prefer to not to take matters into their own hand.

I read a few comments in my blog that mis-selling is "hard to prove". I don't think so....I think it is quite easily proven through affadavits from hundreds of investors, the past risk adverse behaviour of these investors and system of incentives the banks set up to sell these products. RMs were given quotas, motivated by commission and had their performance measured by the volume of particular, the sales of high margin structured products. If these things don't lead to mis-selling, they must have hired priests to be RMs.

Don't worry our system can still work to bring about justice. On Monday 20 Oct 2008, the parliament will convene and this is one of the issues tabled for discussion. It is time for your MP to work for you. Please provide your MP with your affadavits, and tell him or her that you will be watching this sitting of parliament closely. Mis-selling is as illegal as protests in Shenton Way in Singapore. If you have been mis-sold these products, a crime has been committed against you. The authorities cannot let a crime go unpunished especially so in a nation where the leaders are so proud their high integrity....

Minibonds : Same problem, different response.

Do you know the name of the top person in MAS or govt handling the structured products issue? I don't and I believe many Singaporeans don't. 10,000 Singaporeans had their savings wiped out and where is the leadership?....Where are the leaders? The most prominent thing that was said to these aggrieved investors was "That's Life".
In Hong Kong, HKMA head Joseph Yam has taken it upon himself to be responsible for finding a resolution. He initiated 71 direct investigations and pledged to resolved the 1st one by the end of the week. In Singapore, MAS hammered a deal with banks to have them appoint their own investigators.

HONG KONG -- Hong Kong lawmakers accused banks and regulators Monday of mistreating investors who lost millions of dollars buying risky structured products backed by Lehman Brothers Holdings Inc.
Hong Kong Monetary Authority Chief Executive Joseph Yam said 71 separate investigations were under way, involving customers who purchased the Lehman-backed products from nine banks, and he pledged to resolve the first one by this week.
Three banks said they would compensate any customers who can prove they were misled into believing their money was safe.
During an emergency hearing into the scandal rooted in the global credit crisis, the HKMA

Monday, October 13, 2008

Minibonds : DBS compensate investors in Hong Kong...

Add DBS Pays up in HK to your page

Audio was downloaded from and recorded from a SCMP broadcast.

Think about it - same bank, same products....yet DBS offers compensation to Hong Kong investors but not Singaporeans. Why?....

Sunday, October 12, 2008

Understanding the root cause of the current crisis.

Many investors understand this to be a "subprime or mortgage crisis" linked to the housing bubble in US and parts of Europe that eventually lead a credit crunch that brought about a recession in Singapore. There is however a bigger picture and something you cannot ignore to understand the current crisis fully. I've written something about it here : [link] and those of you who read Krugman's book "Conscience of a Liberal" will understand what happened to the middle class in America and the same happened in Singapore as import much of the American style capitalism. The person who really nailed this was an economist by the name of Ravi Batra. In his book "Greenspan's Fraud" he bravely explained the flaws of Greenspan's policies and how it would lead to the eventual collapse of the American system - when the book was published Greenspan was know as the Mastro and the greatest Fed Chairman ever in history - his reputation has been almost completely shattered in the current crisis as most of the problems can be traced to what he did in the past 15 years. Batra's book has been prophetic and accurate. More than one year ago he did a video for a conference describing how he expect events to unfold...and things have unfolded almost exactly as he describled:

"No matter what the authorities do, this crisis will not stop. The only way to stop this crisis is to raise wages in relation to productivity. ...but this the govt will never do..."
- Ravi Batra Sept 2007.

In the next part of the video : [Link] he described what will happen beyond the crisis we are seeing today. The central message is the current crisis is caused by the wage gap and cannot be fixed until a more equitable system is put in place. Several weeks ago a separate study by a British economist showed that the wage gap today is only seen once in 1929 before the Great Depression. Much of the demand in the past 10-20 years was driven by the growth of consumer debt in US and Europe. When this debt grew to an unsustainable level it collapsed and demand will not return until there are major economic and social changes put in place. In other words we are not in a garden variety recession that is easily cured by Greenspan style of easy money policy and encouraging more borrowing. The Americans are maxed out, they simply cannot borrow anymore ....we are seeing a collapse of demand, that will worsen as unemployment rises. According Ravi Batra, things will fall apart and Americans and others will start clamoring for major socio-economic changes...and until the wage gap is addressed, the system no recovery can be sustained.
My blog and many other socio-economic blogs highlighted the wage gap problem in Singapore for almost 3 years. There was no determined effort on the part of the govt to address this. The PAP govt believed that if the economy kept growing everything else can be solved. Ironically, we are the 1st economy in Asia to enter recession despite our govt's "growth at all cost" policies...and the economic growth of 2004-2007 did little to ease the pain of those in the lower income groups. Recession will only worsen the situation. Hopefully the recession compels the govt to act and change.

Time for the Social Safety Nets to be READY and in place....

Last week's Sunday Times had something like 3 articles on how to save money during the recession- buy no frills housebrand goods, use less electricity and eat less meat. I suggest Straits Times not waste its space because most Singaporeans have already been forced to trim down during the "good years" due to relentless hikes - GST, transport, electricity, govt fees, kindergarden fees etc etc. We already know what to do because the good years were also lean years for many Singaporeans. With the recession, retrenchments are expected to hit sometime in Dec 2008. I think more people will go into this recession with near zero savings than in all previous recessions because of the income gap and the relentless price hikes of recent years. Telling them to tighten their belts to spend less doesn't really make sense because they have hardly enough to make ends meet and have been cutting down to the barebones minimum. We saw more poverty during the 2007 economic boom than ever before - regressive taxation, rising income gap, elimination of workers' benefits, rising costs, imported labor etc. What do you think will happen during this recession?

In the very abrupt 1998 recession when scores of Singaporeans were suddenly retrenched and found themselves desperate for help there was no social safety net in place to take care of them. Everything was done in a piecemeal fashion with the unemployed going to the MPs for help. The MPs had to understand what was needed and some token amount was given out as help on the spot. You might think that there were lessons learnt and some kind of comprehensive system should be put in place by now....but once the economy got back on its feet, the govt is sort of busy with the business as usual. With the type of economic system we have in Singapore today, many workers will hit ground zero they day they receive their pink slips because retrenchment benefits were eliminated some time back. They need quick instant help for their immediate needs.

The piecemeal approach of distributing help - queuing up at the MP's office not knowing what help you will get because there is no system in place only adds to the stress. Given the PAP's great fear of giving you too much, the minimum will be will probably be given after an on the spot means test. If the person gets sick, what does he do? Probably let the body heal itself because he has no money to see the doctor. I always wondered what happens if you turn up at the polyclinic sick and without money - will they see you? I don't know and many Singaporeans don't know. May be they will take you to a room ask you to go home and produce all the documentary proof that you have no money before they treat you. Already we are seeing poor Singaporeans not going to the A&E when they really need to do so because they don't have the $65 to pay upfront when they are there.

You might think it is commonsense to have a comprehensive system in place that is well understood by all Singaporeans so that when a crisis of the magnitude we are seeing hits and the bottom falls out, people have to be very clear about the help they can get so they can have some confidence going forward. Giving out help in a piecemeal fashion puts the people under tremendous unnecessary stress. The feller who cannot pay his electricity bill and is given a voucher probably also cannot pay for his child's primary school fees and transport, medical cost, rent and a whole array of expenses. The problem with having a system in place to give help to Singaporeans is this is sometimes called a welfare system ...and welfare is a dirty word for the PAP govt. But it is the PAP govt that created this system in which income gap is the highest among developed countries and frequent hikes by GLCs and the govt takes away the little bit many could have saved for rainy days to boost the corporate profits of Singapore Inc. When the ordinary Singaporean goes down, his plight is as much is own doing as it is result of the system.

Our govt is the most highly paid in the world. During crisis, we expect to see leadership. Hopefully not the same stardard of leadership (or rather lack of leadership) we saw in the recent Lehman Minibonds issue when authorities initially appear to distance themselves from a problem they might created deregulating such products. There don't seem to be any hesitation to 'squeeze' Singaporeans during the 'good' times....but are we going to see a reactive govt dithering on the help for ordinary citizens as the recession worsens? Leadership is about being on top of the situation and not reacting to it. What is about to unfold is the govt response to impending job losses should also be clear, systematic and reassuring. We don't expect a govt that is paid the highest in the world to go for a minimalist approach when it comes to helping ordinary citizens in troubled times. A system has to be put in place in the coming weeks and clearly articulated to the people before the queues at MP offices stretches around the block.