Thursday, October 23, 2008
Justice Bao Gong: Solutions to Minibonds Saga
Good morning everyone,
There are 2 articles published today in the straits times forum where a concerned citizen suggested buying back the structured products at market value, and another concerned citizen recommended that heartland banks do not sell risky products. I applaud their concern to write in to publicise their views, but if their views were to be an indication of the general public's view, then it would reflect that the masses have a poor understanding of how these complicated financial products work.
These form of structured product includes reference to a portfolio of underlying securities and probably several hundreds of other entities which could also include several layers of credit derivatives, collaterised debt obligations (CDOs) and asset backed securities, which are extremely difficult to price, especially if it is marked to market. Global liquidity is so tight now their hardly is a market, and that would further push down the prices of these products, much to the disadvantage of the laypeople.
As we had analysed in our previous post "MAS Speaks up- What investors need to beware", Banks are all profit driven entities, money first, everything else later. However, kudos to CEO of DBS Mr Richard Stanley who has made the initial step to compensate those truly in need, the retirees with life savings in the product, as well as Hong Leong Finance who has went further in buying back the Minibonds from investors who are above 62 and those with lower education.
These are the organisations with a heart, and with a management team like that, you can rest assured these are the banks that will take care of your finances. There are also several other banks who have also marketed the Lehman Brothers Minibonds, but are all sitting quietly at the sidelines waiting and assessing public opinion and MAS next move before they respond: They have a lot to learn from DBS and Hong Leong Finance.
Everyone would like to know how can banks allow a product which is credit linked to an entity that is going to go bankrupt? According to report by asiaone.com, minibonds latest series was just sold to the public on August 2008, where on 15th Sep 2008, Lehman Brothers filed for Chapter 11 Bankruptcy!
Apparently the biggest crook here would be RICHARD FULD, CEO of Lehman Brothers. How can he carry on selling USELESS DEBT to counterparties despite knowing his firm is already on the brink of bankruptcy?
Next on the firing line would be the counterparty banks who had accepted and created this MINIBOND product without doing their due diligence on Lehman Brothers (Their extremely flimsy and weak financials would have been shown in its balance sheet as it had gone bankrupt the very next month!)
The last category that needs to be whipped will be the CREDIT RATING AGENCIES: Why is it that a bank, which is on the brink of bankruptcy, not accurately reflected as it is in its CREDIT RATING? When this final product finally gets packaged and all the various counterparties already got their fat cut of the revenues, the ultimate RISK IS PASSED DOWN TO THE MAN IN THE STREET: The retirees, the man in the street making $726 per month as opposed to Richard Fuld's $726 MILLION!
What the world needs to do is to persecute Richard Fuld and strip him of ALL HIS WEALTH And redistribute this to all the retail buyers who had been conned to buy his criminal products.
The next step for the FED is to slap a heavy fine on the various CEOs of financial partners who had created the MINIBOND together with Lehman Brothers for FAILURE TO UPHOLD DUE DILIGENCE and redistribute this amount to the aggrieved.
The LAST PEOPLE TO be grilled would be the RETAIL Institutions for failing to do their own due diligence on the credit worthiness such as lehman brothers. But DBS bank and Hong Leong Finance had realised their mistake and had been very responsible in proactively stepping out to assist the man in the street by way of their announcing their compensation plans way ahead of the other banks, who are still sitting on the sidelines awaiting if they could get away with it.
SOLUTION TO PROBLEM:
There is a kind soul, Jean-Michel Bardin, who has wrote in the Straits Times with an indepth analysis of the root of this Minibond saga and the proposed solution to it, which is exactly the essence of what we had published earlier in our post "What's the Difference: Banks & Ah Longs". Click there to read more on the detailed solution and do leave your views & comments.
Your humble servant
Justice Bao Gong
The Straits Times
Richard FOOL's blood money: abcnews.go.com