Justice Bao Gong: What's the difference between Ah Longs and Banks?

(Source: Straits Times)
Very simple: Banks are clever while Ah Longs are at the short end of the intellect stick. Ah Longs hang PIG HEADS (Tiao Ter Tao) in debtor houses and get caught by police. Banks sell useless debt (Structured Products) but police cannot apprehend them. Why? Let us explain:

In today's forum, 2 concerned citizens have wrote in the Straits Times to suggest methods to prevent the same fiasco from occurring in future. But all these methods are already in place. With reference to our earlier post "MAS Speaks up- What investors need to beware", we have outlined how banks work behind the scenes and why they will never be wrong. We can only hope that they be ethical and assume responsibility rather than push the blame to the relationship managers (RMs).

Banks have already in place, compulsory compliance and audit training, risk disclosure forms for RMs to sign where they explicitly tell RMs that they have to disclose ALL the risks involved for every product that they sell to customers. As such, banks have already well protected themselves in case a debacle occurs, which it finally did, as in the Lehman Brothers case.

What banks have done was very clever: They need the revenue, but they want to thread on the safe end of the cliff, and thus, they create the above structures to protect themselves, while pushing the onus on the RMs to get the sales and take the blame. Imagine, using a reasonable man's point of view: If a RM is to tell the customer that he stand a chance to lose all his money should a reference entity faces a credit event; would the customer still want to buy the product? Definitely NO, so the onus is on the RM to subtly tell the risks involved while emphasising on the potential PROFIT of the product to influence the greed aspect of the customer such that the customer signs the product even though the RM has briefly mentioned about the risk (but only briefly & briskly) such that the customer did not heed the aspect of the risk but was actually thinking of the potential profits of the product. So when the tapes are replayed, it can be heard that the RM actually did mention about the risk, but the whole conversation was cleverly presented to emphasis on the emotional and the profit side of the product rather than the risk. That is why the suggestions given will not work. We do have a suggestion on a better way to protect the consumers, but the banks may not like it as it will hit their bottom line:

Currently, RMs' remuneration is pegged to the amount of revenue they make for the bank, which means the more 'high revenue' products they sell, the more they earn. What needs to be done is NOT to pay the RM according to the revenue they make, but rather peg the RMs' remuneration based on Customers' SATISFACTION and you can bet RMs will take much better care of their customers, as their income depends on the customers' satisfaction. As we speak, banks will HOWL with protest, as they know their bottom line will be hit. Well, it is for the public to judge: Do you want the banks to earn more? or do you want the bank staff to place priority for your financial well being? You be the judge.
Your humble servant

Justice Bao Gong: Subprime: What your banker did NOT tell you

Much have happened in the recent weeks in the financial circles. The origin of the financial turmoil is from the American housing market, where a recipe of cheap money then and the American Dream of house ownership coupled with bankers and mortgage brokers too keen to achieve their sales targets resulted in today’s financial mess. How then, does this result in the failure of 2 of US largest investment banks and the downgrade of the last 2 to commercial banks? How did Bear Stearns and Lehman Brothers go bankrupt? How did AIG, the largest insurer in America go illiquid?

Around midyear 2003, US Fed Fund Rate was a paltry 1% (Source: http://www.wsjprimerate.us/fedfundsrate/federal_funds_rate_history.htm), creating cheap money and liquidity. Previously, it was the bond insurers and experienced traditional investors who maintained a standard of risk management by placing a premium on the loans based on the seller’s credit worthiness or track record. But due to the growing competition and appetite of these mortgage brokers, more and more brokers are creating ’synthetic ABS’ or CDOs, collateralised debt obligations. The tight spreads on triple B ABS squeezed the traditional bond insurers out of the market, leaving the subprime securitisation market to the CDO sector.

The problem here is that when brokers package these CDOs, they do not assume the inherent risks involved in the underlying ABS- It is the investors that bear the credit risk. Renowned credit rating agencies rate these CDOs based on the underwriters, ie the mortgage broker or the banks, and they generally obtain very good credit ratings, and they may not rate the underlying asset which are the slices of subprime securities which are difficult to assess due to the intricate layers of packaging.

So, now comes the important part: What your bankers DID NOT tell you:

When investors, especially retirees who invested their life savings, 401k, etc into such structured products, ie minibonds, etc, they are usually not told the whole story. In fact, the name of the product is already misleading. When laypeople hear the word ‘minibonds’ they were given the impression they are buying a double A rating bond linked to the huge investment bank or corporation. What the salesperson may not tell you is that this CDO product is also linked to hundreds of ABS. aka, sub prime securities which are not rated and any credit events occurring on these securities could result in loss of capital.

The salesperson cannot entirely be blamed too. He is also working for a living, and he has revenue targets set by his bank and he will be fired if he does not meet his targets. If the salesperson tells the whole truth to the customer, he will lose the sale and face the possibility of being fired.

Banks make their sales staff sign on declaration forms that on one hand, require their bankers to explain ALL the risks related to the products to their customers, and yet on the other hand, will fire them if they do not achieve their sales targets. This is a fantastic way of protecting the bank themselves while relegating the blame to the sales person if anything goes wrong. There was an article written by a kind certified public accountant to Monetory Authority of Singapore (MAS) but according to the article, not much has been addressed- I have attached the letter for your reference (source: Today Newspaper)

Why do I know so much about banking products? Because I was a former banker, and I have been through it all, and it is time to share with the masses all that is happening behind the scenes, and share with the man on the street things that your bankers do not tell you.

If you find the articles to be beneficial, do Bookmark us (Ctrl D) and recommend the website to your friends so that they too can benefit, and please do send in your constructive comments. If you know of a subject that is currently creating some hardship for the man in the street, please do post it on this blog and we endeavour to research and publish it for the benefit of all.

Your humble servant.

(Source: Today Newspaper)