Friday, October 24, 2008

Minibonds compensation

Now that DBS, among other banks, is starting to compensate investors, this opens up whole new issues to consider.

For starters, the definition of who's going to get compensated is bound to make some people very happy, and some very unhappy. Frankly, I think the whole episode of compensation stinks. It just seems so arbitrary who's going to be made whole and who's going to be left out in the rain. 

I like the Hong Kong plan better as it forces banks to make a market for these highly illiquid securities. Now do bear in mind that investors will have to swallow major losses by selling these securities at 'market' prices back to the banks (it remains to be seen how market prices will be arrived at when these securities were never meant to be traded on a secondary market).

The reason why I dislike the Singapore version of the Minibond resolution is that it conflates the two issues of investment risk and legal liability for product misrepresentation/mis-selling.

Everyone who bought the Minibonds should be on the hook for losses, regardless of educational level, retiree status, life savings on the line etc. But if investors feel hard done by misrepresentation or mis-selling of the Minibonds, then it should be the courts and the legal system that should decide if the banks should pay damages to the investors (which may be the total sum invested, or perhaps even more to take into account 'emotional distress' and the like). And in the public interest, perhaps it should be a regulatory authority like the MAS that undertakes legal action on behalf of all investors, and not just those that lost money in this Minibonds fiasco. In doing so, MAS could also seek to impose a punitive penalty on banks that actively hard-sell such risky products to retail investors, and hence discourage such behavior in the future.

Instead, we have some banks (and not every bank who sold the Minibonds) arbitrarily deciding who to make whole based on some in-house measure of whether the product should have been sold to so such and such investors or not. That is just so wrong. But then again, maybe this is what our vaunted monetary regulatory authority wants: to leave "doing the right thing" open to interpretation so it absolves itself of responsibility, doesn't have to take an unambiguious stand (in any direction),  and hence doesn't have to  offend anyone at all.

As for other peripheral issues:

DBS shareholders are probably none too pleased by this turn of events, but frankly, bad publicity is more costly than just $80-$90 million dollars. DBS had already committed itself to this fiasco when it decided to distribute this risky structured product. Oh, and my previous comment on how this will indirectly cost taxpayers still holds.

Thus far, it appears that DBS will compensate those investors it has decided to make whole out of its own funds. However, if I were one of those investors not compensated, I would be mighty suspicious about whether the compensation were to be at my expense, that is, if the compensation monies could possibly have come out, at least in part, from the dregs of what remains of the Minibonds. This is a very remote possibility, but if I were such an investor, this would be exactly what I would be asking DBS management.

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