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Courtesy of Wayang Party.
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.
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.
(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.
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:
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.
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.
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Audio was downloaded from wayangparty.wordpress.com 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?....