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WE haven't seen a controversy like this for a long time.
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| TNP PHOTO ILLUSTRATION: SIMON ANG |
Investors stand to lose hundreds of millions of dollars in structured products called Minibonds (Mini) and High Notes 5 (Hi-5). The losses stem from bankruptcy of the US investment banking giant Lehman Brothers. Investors here and in Hong Kong claim sales people had misled them into thinking Mini and Hi-5 were safe. No one told them Lehman might go broke, or that it would cause Mini and Hi-5 to default. Now, investors are sitting on big losses and want the distributors to pay. There have been demonstrations, petitions and calls for government action here and in Hong Kong. Were investors misled? Here are two sides to the story. You decide. Everyone: It's not fair So far, all stories about Mini and Hi-5 have said (i) they are risky and (ii) investors were not informed of the risks. Here is a sample of comments: An online petition in Singapore says: 'The consumers were not made aware of the high risks involved in the financial product when buying the product. They became innocent victims of misrepresentation by the financial institutions that distributed the structured products.' On 28 Sep, the Sunday Times ranked investments on a scale of 1 to 10. Complex structured products came in at No 7, riskier than shares (No 6) but safer than futures (No 8). DBS bank is at the centre of the storm since it was the issuer of Hi-5. It concedes it was risky. DBS said in a 24 Sep letter to Straits Times Forum: 'High Notes 5 is not a 'low-risk' product.' Hong Kong investors said: '(The banks) were misleading investors on the risk. They said the Minibonds were highly stable.' A 34-year old accountant said sales people told her elderly father: 'It's very safe. It's just right for you.' Doc Money: It's fair I may be the only one who thinks Mini and Hi-5 risks were low and fairly disclosed. Consider this: Suppose you are walking down Orchard Road and get hit by a meteor from outer space. Should the Land Transport Authority have warned you? How about the Ministry of Environment? Someone must be responsible! Of course, it is an unanticipated event. It was no one's fault, not even yours. The same is true of Lehman's bankruptcy. It was one of the world's most established investment banks. Who could have guessed 15 months ago that Lehman would be the victim of a US financial crisis? Page 1 of the Hi-5 brochure and pricing statement dated 29 Mar 2007 says Lehman debt is rated A+ by Standard and Poor's (S&P). That's high. The country of Malaysia only got an A- rating. The same for Minibonds. Page 15 of its pricing statement dated 11 May 2007 says, 'Lehman Brothers Holdings Inc has a long-term debt rating of A+ by S&P.' Does anyone really think the sales staff should have told investors: 'Please pay no attention to S&P's A+ rating of Lehman Brothers. My analysis shows Lehman Brothers will go broke.' Even if the sales staff were so insightful, who would have believed them? There is a good reason why investors were never warned of Lehman's bankruptcy. It is because the chances of it occurring were near zero when Mini and Hi-5 were sold in mid-2007. Back then, even experts like S&P thought Lehman was super-safe. Real problem is high costs Don't get me wrong. I don't recommend that you buy structured products. But it isn't because of the risks. Those are low. The big problem is costs. They are high and well-hidden. It pushes returns to the lower end of the advertised range. That is the real scandal. I will tell you about it next week. 
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