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.