Sunday, October 19, 2008

Toxic times

These are trying times in Singapore for some 10,000 people. I am not sure that all of them are Singaporeans. It may very well be. These 10k people are looking into a hole so big and wide, and bottomless, that I suppose you'd understand that some would want to jump into it. Fortunately, so far, we haven't heard of any superman acts in our tall tall buildings (some soon to rise to 50 floors!) nor our above-ground subway stations. It would appear that the SMRT cannot erect barriers at its stations soon enough to prevent people using its platforms as launching pads into...I don't know where anyone wants to go by jumping in front of oncoming trains...

Well, by now, you would have guessed that I am referring to the 10,000 people who potentially have lost all their investments (and life-long savings for some) in the mini-bond saga that resulted from the collapse of Lehman Brothers in the US. All investments linked to this Investment Bank are in jeopardy now. It is hardrending when you read of senior citizens losing their entire life-savings in this ONE investment. But on the other hand, you cannot but feel how foolish they are for putting all their eggs in one basket. Has half a century of life and living, which probably included several recessions, not taught them about anything? Yes, many of the Relationship Managers (RM) that the bank employed should bear the blame for pushing otherwise risky products down the throats of aged investors who know nothing, or are not interested to know about the complexity of the product beyond the amount of money they are putting down and the interest they will earn.

Indeed, I have heard of young RMs gloating about the $20,000 they earn per month doing what they did, relieving old and maybe not-so-old but cash-rich people of their life-savings to put into 'principal-protected' and/or high-interest-yielding structured investment products. In retrospect, I am sure neither the RM, nor the investor, understood the nature of the mechanisms underlying these investment products. This calls to mind the true story of the wildly successful mortgage bond traders at Saloman Brothers (SB), before it collapsed in the 1980s, who weren't even trained in finance. (As told in Michael Lewis' Liar's Poker) It will be farfetched to equate SB's young and hot-blooded mortgage traders with today's RMs or the products they sold, but the role they played is not all that different, in retrospect.

In retrospect too, 'principle-protected' means nothing, and even plain vanilla savings deposits for that matter, if the bank that helms the investments and deposits goes bankrupt. We always see better after the fact. Our vision suddenly improves to 20-20. Truly the prophet is without honour in the free-wheeling world of leveraged investments. Who would have thought, much less predicted, that Lehman Brothers would collapse, or for that matter, AIG? Certainly not DBS Bank, and others whose error was to retail toxic investments and not see them for what they were, much like ignorantly selling melamine-tained milk powder. If the investments people in these banks, who probably have a ton of MBAs, cannot see a toxic financial product for what it is early, how much more the man in the street? (Interestingly, Lewis claimed that Salomon Brothers crumbled when it started to rely more on educated professional financial people rather than on people with raw trading skills but had otherwise no financial training).

For the rest of the 10,000, and more, caught in the repercussion of bank failures in the US, it is cold comfort. All have lost money, though none as spectacular as those that bought into the Lehman Brothers' mini-bonds and related funds. And all shouldn't expect the government to bail them out. Whatever money the government has belongs to the taxpayers. Surely you do not expect a lowly paid bloke like me who never dabbles in investments beyond FDs to foot the bill of others' failed investments? Where is the fairness in it? Would these same people who, if they had made money from these investments, share them with me?

So I think that the MAS is doing the right thing now. Investigate the matter, and if the Financial Institutions have breached any laws through the conduct of its RMs or others, or have been manifestly negligent, get them to 'do the right thing', as MAS' Managing Director, Mr Heng Swee Keat is reported to have said. There is no question that the Singapore government SHOULD NOT buy up these toxic assets with taxpayers' money so that the same investors who have lost a bundle get to invest another day in financial products that nobody understands. The lesson is a hard one, but we must be fair in the whole thing, particularly to those who have had no hand, not even a finger, on these financial toxins.

Even if the FI's buy back all the toxic Lehman bonds, like what the Hong Kong FI's have done, it'll hit the bank's shareholders. Oh well, in these stressful times, almost nobody will get away scot-free.

Disclaimer: I am not a financial consultant. Anything written here are my personal opinion. The reader should consult a professionally qualified person for advice on matters relating to investments and risk. However, it appears you can't trust anybody nowadays. You'd want to take with a pinch of salt what any finance person, qualified or not, would tell you nowadays, except the very helpful Mr Tan Kin Lian, who perhaps should stand for election for Parliament in the next General Election, seeing as By-Elections have lost its favour with the sitting government.

Picture shows the attractive but poisonous berries of the Yew tree.

Image source: Author: Mike


Anonymous said...

Ask your clients, parents, friends etc to view this useful financial tips, the more people know it, the more liquidity it will be, and it is of advantageous to everyone…..So you’ll have more leisure time….

Epilogos said...

Thank you for pointing this out. I have put the link in the main body of this blog entry.

Hopefully, all of us have learnt the right lessons, or will do so at Kin Lian's blog.

Cappella said...

Some got away scot-free. The RMs got away scot-free. They earned their commissions are could already be long gone at some Bali beach sipping fruit juice. :P

Anonymous said...

I think there is mis-selling and the FIs/banks should top up all the difference in amount for selling such products.. Reads this:

If we can change our mind on deposit guarantee overnight to prevent overseas investors from parking their money outside Singapore - we can jolly well fine the FIs/banks and protect our own citizens.