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?

22 comments:

redbean said...

what about the stock markets with all the big funds bludgeoning the small and helpless investors?

Anonymous said...

our gahmen always intervene and get involved when they are not supposed to and hands off when they are supposed to be involved. Complacency at its very best

Anonymous said...

what PM Lee says makes a lot of sense. As he was the proponent of free market economy as the then Minister of finance when this product was launched, of course he cannot back track and say MAS was wrong in allowing this to be sold to retail investors.
So the 10000 investors will have to wait and see, when MAS could have forced DBS hand.
Where is the leadership in all this? With Tan Kin Lian.

Anonymous said...

It is difficult for MAS to perform their task as regulators when the government also owns a stake in DBS and have many cronies to take care of.

Anonymous said...

陈先生,

多谢您的作品。

无知的投资哲学要您这样的贤人指导。

Anonymous said...

I JUST WANT TO SAY THANK YOU VERY MUCH TO MR. TAN FOR TAKING TIME AND EFFORT IN PROVIDING US WITH SUCH MEANINGFUL INFORMATION AND ANALYSIS. I WISH SOME OF OUR MAINSTREAM MEDIAS CAN BE AS GOOD AS YOUR BLOG SOMEDAY.

WISHING YOU ALL THE VERY BEST.

Anonymous said...

Even Greenspan has backtracked on unfettered free market so can some1 pls tell PM Lee it is safe to populist now!

HSI at 11082 on a day with no major news.

Its time for Ho Ching to defend the local stock market!

Anonymous said...

i recently had a conversation with a PHD student which goes something like this.

my plate of charkwayteow has a lot of unhealthy oil in it, the cook shouldn't hav used so much oil.

phd student: how do you know the cook was responsible for it? do you have prove?

well, if the cook didn't cook my plate of charkwayteow, who did? your professor?

phd student: all i am saying is that the cook could be the dish washer, you can't negate that possibility now could you since you didn't actually see who the cook was?

oh, yes. i should have gone into the kitchen and verify who the cook was before i put the blame of my plate of kwayteow swimming in oil on the cook.

PHD student: yes you should have. and btw, you claimed at the time you were eating your plate of chawkwayteow, why then are you complaining about oil when charkwayteow is suppose to be oily?

oh forgive me. i didn't see the possibility that the cook, or dish washer, could be a bad one. thanks for sorting it all out for me.


btw, i also got PHD - doctor of pathology

and our future is secure.

AlphavilleSG said...

Anon 5:56 PM

If I were you, I would have bet another plate of char kway teow against the pea brain, my second opinion is that Singaporean just aren't enterprising enough.

Anonymous said...

Well, in our school's obsession of grades, we actually end up with a bunch of people who can score for exams but can't think. People who think they are elite, but are actually not.

They appear elite simply because they mugged harder than everyone else, putting grades ahead of learning.

Anonymous said...

And yea, these pseudo-elites are gonna run Singapore. God bless...

Anonymous said...

if you have money problems, get an economist to shift the problems

if you get sick, get a physician to examine you head

but if you are in trouble with the laws, you need to talk to a novelist

finally, if the world is in trouble, they need to turn to the lky school of public policing

Anonymous said...

and if you need money, it is blessed to give away your money for a good cause like in some estate funds.

Anonymous said...

if only the old or uneducated can be deceived into buying this product, then why MAS with it's army of financial experts did not spot the danger of these products and ban it?

Anonymous said...

many possible reasons :

1 MAS financial experts all got fake degrees

2 MAS gets to benefit in some way

3 MAS cannot ban something that is endorsed by MM himself. MM thinks all american banks are good buys (now become good bye)

4 MAS need to create a golden era environment

5 MAS need to educate the public about betting big and lose big in prepartion for the opening of the IR. See, the government also betting on the IR to make money.

6 MAS led by SM means all officers are paid peanuts, so u get monkeys.
Monkeys not worried about losing dollars, they only care about peanuts.

7 MAS is still looking for its missing SELAMAT. No time to look at minibonds lah.

8 MAS is actually a subsidiary of DBS.

9 MAS master minded this saga to show singaporeans that CPF is still the best fund in singapore, and some say in the world.

10 Someone in MAS is still sitting on the report by the financial experts that say these are toxic waste.

4

Gila Babi said...

Check out part of the latest report in ST, aprticularly the last part on how DBS calculated the credit event redemption amount:

High Notes 5 worthless
By Francis Chan & Selina Lum

"An investor who did not want to be named said yesterday's zero calculation was inevitable.

'Guess that was the message the bank had prepared us for, so now we'll just have to wait for the forum on Thursday,' said the 52-year-old man who invested $50,000 in the product and will be attending a dialogue with bank officials tomorrow.

A DBS spokesman told The Straits Times: 'Unfortunately the worst-case scenario has materialised and the majority of High Notes 5 investors will not be receiving anything back.'

When the bank distributed the structured notes last year, the likelihood of Lehman filing for bankruptcy was extremely remote, she said.

But she added that in cases where DBS' standards were not met when the notes were sold, the bank will take responsibility and 'investors will be compensated accordingly'.

The bank has estimated that it will pay compensation of about $70 million to $80 million in Singapore and Hong Kong, where it sold a similar Constellation Series of notes.

In Hong Kong, there are 3,300 investors who invested about $257 million in the notes.

The payout will go to people such as retirees who the bank feels were mis-sold the risky product.

On DBS' part, it does not profit from the unwinding of these notes.

While yesterday's zero valuation was expected, questions have been raised over how the figure was arrived at.

Lawyer Siraj Omar, from Premier Law LLC, combed through the High Notes 5 pricing statement and told The Straits Times that it contains four different formulas for calculating what is called the credit event redemption amount.

A credit event is triggered when one of the entities linked to the notes defaults.

Two formulas are absolute calculations while the other two are percentage calculations.

'DBS has now given its calculation of the credit event redemption amount based on just one of the four formulas. The question is whether there is any justification for selecting this particular formula over the other three,' said Mr Siraj.

'If there is no justification based on the terms and conditions, the question arises whether the notes should be considered void from their inception.'

A DBS spokesman said that three of the various formulas are 'consistent with each other and mathematically the same' while one has a 'typo error'.

Lawyer Raymond Lye, from Pacific Law Corporation, said the credit event redemption amount 'appears to be described in several different ways'. But he cautioned that bank contracts usually contain clauses that protect the bank in the event of ambiguity.

franchan@sph.com.sg

selinal@sph.com.sg "

Of the 4 ways stated on the prospectus to calculate the credit event redemption amount, 3 are the same while the 4th has a typo error - that is, wrong. So there is only 1 way to calculate! So why put the 4 ways there - to mislead people? To use whichever way that gives redemption = 0? And DBS can still claim that this is not mis-selling?

Dialogue with DBS? It is a sheer waste of time! What are they going to get? Some top brass justifying DBS position, what else?

The outcome is sadly clear and inevitable. The signal is Lim Hng Kiang not SM Goh telling us that the govt had decided to gurantee deposits because of fear of flight of capital to other countries. The FIs, as we have seen, are now adopting divide and conquer tactics to reduce the anger of the investors and they will simply defend & justify their position since they are backed by MAS and govt. So typically Singapore. Always the big MAN will walk all over and shit on the little man.

Are we to tolerate this any longer? Can we afford to wait any longer? Do not forget this in the next GE!

Anonymous said...

I've got burnt by this whole financial fiasco, but there's one thing I know: It's my fault!.

Come on. When the bonds make money more than what's expected, I don't see anyone openning their mouths saying that the banks are so wonderful. They go bragging about how smart they were to have made the investment. Everyone knows that the higher the risk, the higher the possiblity of better returns. And all investments carry some risk. So for some decency instead of blaming the Gov, the banks and what ever dumb institution, try pointing the finger at ourselves.

Grow up and take some responsibility instead of pouting.

Anonymous said...

Anonymous 8:24 AM is very wrong to say this. Do you know what is mis-selling? Let me explain to you, it means the invester is told what is not correct about this product.

Even if the contact says otherwise in small print about this product, most people who are not guru in the financial and law gargon will believe what the seller says.

If the product collapse because of what the investers are told, i believe most people would not have complained.

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