Structured Products ( incl Minibonds, High & Pinnacle Notes)

[iam802]

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'.

What kind of typo error?

A typo error in the wrong place can cost lots of money!! (<< Let's hope it is something insignificant that does no harm to all parties involved)

[LenaHuat]

If a German economist mistakes a "comma" for a "dot" in his mathematics, he would pay for it with his head

[financecaptain]

Got the following from Straits Times dated 29 October 2008. Investors are being taken on a ride on the so-called High Note 5.

The structured note is as good as getting the investors to write a 5 year Credit Default Swap (CDS) on any 5 banks includuing Lehman. The premium is 5% per annum (only) for 5 years and settlement price is 100% of principal, which you need to provide the 100% collateral upfront (screwd again).

A lousy deal even for any CDS traders because any if any one of the 5 bank defaults, you have to make 100% payout on the CDS. Typical contract is only 1 insured party and now your risk has been increased 5X for 5% per annum premium ! And you need to provide the 100% collateral upfront. In the CDS market, collateral value is not likely to be 100% or else traders would not be motivated to trade as there is no leverage !

Although the instrument is 5 years, typical CDS trader can exit the principal risk by selling away its position at a marked-to-market lost (e.g. may be 7% annual premium payout with another party now against the 5% that you agreed to receive previously). For the High Note 5, investors were locked in completely and they could not reverse their position at a loss to prevent loss of principal. And this liquidity risk, I believe is not even priced into in the product (screwed again). Just before Lehman went bankrupt, its 5-year CDS was trading at 7.90% or 790 basis points, about 3% above the 5% on the High Note.

Finally on the default settlement, the High Notes guys are settling with 100% loss as DBS is declaring that they are worthless now. But on the CDS market the settlement price for Lehman CDS has been set 91.38% as the existing Lehman bonds have recovery rate of 8.625% (screwed again).

CDS is like a binary option (outcome is zero or 1) on the credit risk of a company (the High Notes is on any 5 companies) . Getting the investor to write a CDS or credit-linked binary option is risky for any traders or corporates never mind the potenial return. And you are selling it to the retail market for a miserable 5% return ?

In my view, it is not a case of mis-selling technique. It is as good as selling toxic product to the masses; very much like the milk scandal in China. It is indeed the responsibilty of the regulator, in this case, the MAS to do something. Not behaving like what our oposition MP said "隔岸观火".


Straits Times 31 Oct 2008

SOME DBS High Notes 5 investors are broadening their complaints against the bank that sold them Lehman Brothers-linked investments that are now worthless.

They want to press the case that the structured product had 'flaws' and should never have been sold to them to start with.

This is different from complaints that have so far been lodged against the bank, which centre on allegations of 'mis-selling' of products that did not suit investors.

Two representatives from the 250-strong grouping - which has dubbed itself the 'DBS Hi Notes Investor Group' - spoke to The Straits Times in between two forums organised by DBS at Suntec City yesterday.

They contend that High Notes 5 was a high-risk product not suitable for retail investors.

'There is a systemic failure in the product itself,' said one, who asked to be known as Mr Leong, 47.

'In fact, we got the bank to admit during the forum that the product is indeed not a low-risk product,' he added.

Said the other representative, 38- year-old Kenneth Tay: 'We asked them to rate it on a scale of one to 10, with 10 being the highest, and they said High Notes 5 was between eight and nine.'

Mr Leong invested $100,000 in the doomed product and Mr Tay, $75,000.

Their argument marks a shift away from the current focus on investor complaints about mis-selling of Lehman-linked products, especially to elderly or lowly-educated investors who could not understand their complexities.

DBS, like other financial institutions, has agreed to focus on helping 'vulnerable' investors such as the elderly and less educated and to probe mis-selling claims.

The bank is reviewing all sales transactions on a case-by-case basis regardless of whether a complaint has been made.

Mr Leong said the 250 investors agreed that High Notes 5 had three key flaws. 'The first is the product itself, the second is the sales process and third, the way the bank targeted customers,' he said.

On product flaws, Mr Leong said that with help from a 'finance expert' who had experience in manufacturing structured products, the group had learnt that as investors of High Notes 5, they had unfairly become 'insurers' to the credit default swaps (CDS) which backed the product.

On the sales process, Mr Leong said that it was agreed among the group that the DBS relationship managers who sold the product could not even explain the product features clearly.

'It is our view that they are inadequately trained, so how can inadequately trained people with faulty knowledge hope to advise people who know nothing?' he asked.

Mr Leong said the third issue was the way in which the bank had approached customers to sell the product.

'Many [investors] share this story: They went to the bank to renew or open a fixed deposit and somehow ended up buying into High Notes 5,' he added.

'How can one associate a customer who is looking for a largely safe product like a fixed deposit ending up with such a high-risk product?'

Mr Leong and Mr Tay said they did not get satisfactory responses at the forums from DBS consumer banking head Rajan Raju.

When asked to comment on the systemic flaws raised by investors, Mr Raju told reporters: 'All investments, as you know, are governed by the Financial Advisers Act in Singapore...and so far, all our products are benchmarked to the Financial Advisers Act.'

He added: 'What we are trying to say is that where there is a breakdown in our process, we will make sure that we take the responsibility and fix the problem.'

More than 360 investors of High Notes 5 attended the two sessions of the dialogue organised by DBS.

These came after 166 investors had visited DBS' Shenton Way headquarters on Oct 21 to call for an open forum.

One investor, who declined to be named, said he had heard little new.

'But today they gave us this complaint form with 16 questions to complete, and promised us a fair review, so let's hope for the best - there's not much else I can do anyway.'

The 1,400 investors who bought High Notes 5 would have received letters from DBS by today informing them that their investments are worthless.

[millionairemind]

Wonder if this will happen in Singapore?? But then, I must be dreaming..

Home > Breaking News > Money > Story
Oct 31, 2008
HK watchdog may sue

HONG KONG - HONG Kong's Consumer Council said on Friday it was considering suing banks which allegedly mis-sold mini-bonds backed by failed US investment bank Lehman Brothers as risk-free investments.
The 50 cases the council was considering backing mostly concerned vulnerable elderly people who said their banks had not fully explained to them the risks involved when selling them the mini-bonds, a spokesman for the council said.

The complainants in the cases, which involved 14 banks, had invested between HK$100,000 and HK$2 million (S$18,991 and S$379,826) in the controversial financial products.

'We will continue our vetting to identify representative cases for legal action,' the spokesman told AFP.

'We now have HK$16 million in our legal action fund. But the government has promised that it will give us unlimited financial support once we have identified cases with good grounds,' she said.

Mr Johannes Chan, chairman of the council's legal action fund, told the South China Morning Post that their focus on elderly and poorly educated investors would give them a higher chance of success in court.

'It's easier to establish that their trust has been abused or that they have been misled than (to make the same case for), say, someone who has a university education and has invested for years.'

Despite their name, the mini-bonds are complex financial products linked to a bundle of derivatives backed by Lehman, and their value plummeted after the investment bank collapsed in Sept.

The council said in a statement that it had received 3,638 complaints and 1,388 enquiries from investors.

Meanwhile, more than 100 investors protested outside the Hong Kong Monetary Authority, the city's de facto central bank, before marching to individual banks to demand a full refund of their investment on Friday morning.

Individual banks, including the Bank of China (Hong Kong), have started to negotiate compensation deals with customers. But many of the cases remained left out as gathering evidence to prove mis-selling could be difficult.

All the banks have agreed to adopt a government proposal for them to buy back the products from customers at their current market value but the move failed to pacify investors who said they would only get back a portion of their investment. -- AFP

[millionairemind]

This does not bode well for DBS stock in the near term.

Nov 1, 2008
Buyback demanded

INVESTORS who bought a similar product to the now worthless DBS High Notes 5 left dialogues with the bank yesterday unable to obtain the quick resolution they wanted.
They expected DBS to offer some form of 'blanket buyback' of the product but were told to lodge complaints if they felt misled into investing.

Almost 400 people who bought the High Notes 2 product attended two separate dialogues yesterday specially set up to allow worried investors to ask about their investment.

High Notes 2 still has value, unlike High Notes 5, but it is hovering around 16 per cent of the initial value so investors fear that they may also be left with nothing eventually.

About 1,000 people here - mostly priority banking customers with over $200,000 in assets each - have $70 million tied up in the product.

Yesterday's sessions, which followed similar forums on Thursday for High Notes 5 investors, were closed to the media.

Investors said later that most questions centred on whether DBS should offer to make an immediate 'blanket compensation'.

One investor, a 38-year-old computer engineer who declined to give her name, said: 'Most, if not all of the people in the room, were like me; they feel they have been misled into buying the notes.

'We demanded 100 per cent compensation but DBS said they will look at our complaints case by case.'

Investors who spoke to The Straits Times had invested between $25,000 and $500,000 in High Notes 2. DBS told them that reviews would be done on a case-by-case basis. This is also its approach to investors in High Notes 5.

The High Notes 2 product is similar to High Notes 5 except for one crucial detail - its eight 'Reference Entities' do not include the now bankrupt US bank Lehman Brothers.

It was the direct exposure to Lehman Brothers that triggered the collapse of High Notes 5.

But High Notes 2 still has an indirect exposure to Lehman as well as US mortgage giants Fannie Mae and Freddie Mac, both of which are now on life support.

DBS said this exposure led rating agency Standard & Poor's to downgrade the collateral of High Notes 2 on Sept 23.

The bank said the downgrade will not mean an early redemption of the notes - they are due to mature in 2011 - but the latest indicative valuation has fallen to 16 per cent. That means every dollar invested in the product is now worth just 16 cents.

Investors get a semi-annual payout of about 4 per cent for the first three-and-a-half years and 5 per cent a year for the last 18 months.

DBS has also periodically assured investors that if the five-year notes were 'held to maturity', they will receive the principal invested, barring any credit event and early redemption.

Meanwhile, the 300-strong action body called DBS Hi Notes Investor Group fired another salvo at the bank yesterday.

'The immediate post-forum reaction of most attendees is that the sessions have not moved the complaint or the compensation processes forward in any significant manner,' it said.

[LenaHuat]

So we now know that some of our town councils collected this toxic stuff. DBS is now prepared to rate these 7-8 out of a scale of 1 (low risk) to 10 (high risk) . Wonder if our heavily 'endowed' statutory boards like CAAS, CPF got into the same act

[kennynah]

actually, i am unclear as to how CPF utilizes our CPF money, whether they have the skillsets to directly invest or our monies are managed by GIC?

[LenaHuat]

I've been asking for a long while abt 'who' owned the senior USD-denominated notes of these toxins whilst the sorrowful investors from HK and Singapore bought the subordinated notes and now I found the answer from 2day's NYT:

The synthetic C.D.O. grew out of a structure that an elite team of J. P. Morgan bankers invented in 1997. Their goal was to reduce the risk that Morgan would lose money when it made loans to top-tier corporate borrowers like I.B.M., General Electric and Procter & Gamble.

The bankers who invented the synthetics for J. P. Morgan say they kept only the highest-quality and most bulletproof portions of their product in-house, known as the super senior slice. They quickly sold anything riskier to firms that were willing to take on the dangers of ownership in exchange for fatter fees.

For years, the product that Ms. Masters and her colleagues invented remained just a mechanism for offloading risk in high-grade corporate lending. But as often occurs with Wall Street alchemy, a good idea started to be misused — and a product initially devised to insulate against risk soon morphed into a device that actually concentrated dangers.

This shift began in 2002, when low interest rates pushed investors to seek higher returns.

“Investors said, ‘I don’t want to be in equities anymore and I’m not getting any return in my bond positions,’ ” said William T. Winters, co-chief executive of JPMorgan’s investment bank and a colleague of Ms. Masters on the team that invented the first synthetic. “Two things happened. They took more and more leverage, and they reached for riskier asset classes. Give me yield, give me leverage, give me return.”

As history tells us, these became lemons

[millionairemind]

Lena,

History does repeats itself.

Reminds me of a book i read called Liar's Poke by Mike Lewis who used to trade for Salomon Brothers back in the 80s. They started the CDOs there and SB always keep the most profitable tranches to themselves and sell the rest to the other suckers.. erm.. investors

If you honestly believe that a (investment) bank has your interests at heart...

Cheers,
mm

[LenaHuat]

Hi MM

Ha, ha........... From my experiences with banks (be these consumer or investment banks), they are juz mercenaries that oil the industry.