Wednesday, October 22, 2008

Some quick thoughts on the Minibond fiasco

I have less time these days to blog in-depth about topics I am interested in, but nonetheless, I will pen down some quick thoughts. This post is on the Lehman Brothers Minibond fiasco.

I wrote a post on structured products about 3 months ago, and it is as relevant now as it was before.

Notwithstanding the plight of retirees losing their lifesavings (which is regrettable), I can't say I have much sympathy for the people who lost thousands of dollars in this most recent investment debacle. The golden rule is: don't know, don't touch. If people were more diligent with their investments, asked a few more questions, had a healthy dose of skepticism, and weren't swayed by the greed for an improved yield of a few percentage points over the fixed deposit rate, without questioning the disproportionately higher level of risk they were shouldering, they wouldn't find themselves in this situation today, gullible things that they are.

As it stands, my opinion is that their only case for getting their money back is to sue for misrepresentation of the product they were sold. And the chances of success for that are slim to none. After all, information on the product could be found in the prospectus, in black and white. The investor should take responsibility for their own actions. Even if he or she was unable or unwilling to read and understand the prospectus, he or she could have sought professional advice in doing so.

[To would-be flamers, please note that I am NOT indulging in an exercise in schadenfreude. I just think that investors should bear some responsibility as well for their losses. Ignorance is a poor defence for one's actions.]

Some other quick thoughts:

How much do I think investors will get upon dissolution of Minibonds? At best, pennies on the dollar, and more likely, nothing at all. Numbers like 50-70% are pure fantasy.

Separately, if the local banks (like DBS) do compensate investors out of their own balance sheets under overwhelming public pressure, you should realize that this comes indirectly out of taxpayers' money. Why do I say that? Because the government has recently tweaked the laws to allow it to spend more of our reserves, and the government owns large stakes in many banks (including DBS and Citibank) through its sovereign wealth fund holdings. I am not presuming a judgment call on whether bailing out the 10000 disgruntled Singaporeans (including impoverished retirees) is the right thing to do (or not). I am merely stating categorically that thanks to the government's byzantine layers of ownership of stakes in local banks, there are taxpayer dollars involved here should investors be compensated.

As for MAS's laughable comment on local banks to "do the right thing" and PM Lee's remarkable silence on the fiasco:

MAS is showing how toothless it really is. It can say anything it wants on this matter, but it either lacks the power or (perhaps more likely) the political will to enforce any of it.

As for the PM, I think it's a good move (for him) to say nothing. As the old adage goes, if you have nothing good to say, don't say anything at all. If the PM comes out with a speech that is anything less than in strong favor of making investors whole, investors who have been incessantly portrayed in the media as being impoverished retirees who have lost their life savings, he risks huge loss in credibility, empathy, political name it. On the other hand, if he does make such a speech, you can kiss goodbye to all the hedge funds, slush funds, private equity and other monies that have made their way here thanks to our friendly, welcoming, lightly regulated, and most importantly, discreet and circumspect environment.

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