Two months ago, the New York State Attorney took action against several financial institutions for marketing the "auction rate securities" to retail investors on the representation that they are liquid investments and can be redeemed at any time. The financial institions had to buy back these securities at no loss to the investors.
I hope that the Monetary Authority of Singapore or the Attorney General can take similar action on behalf of retail investors who had been misled into investing in the Mini-Bonds and similar structured products by their bank's relationship managers in the belief that these investments are safe.
It is time to hold the financial institutions accountable for their mis-selling activities and for our regulators to be pro-active.
Friday, September 19, 2008
Minibond Series 6
This blog was first posted on 16 July 2007
Dear Mr Tan
My risk-adverse retired father has always placed his funds in fixed deposits as they are risk-free.
I saw the advertisement in today's papers for the minibonds series 6 which pays 5.1% for 5 3/4 yrs.
These bonds seem to be relatively low risk and the returns appears good. Is there any catch? I'm considering asking my dad to transfer his funds to buy this since his fixed deposit is maturing. Can you advise?
-----------------------------
REPLY:
The Minibond series 6 pays 5.1% p.a. for 5 3/4 years. This payment comes from the principal invested in the fund, and is NOT the same as the actual return earned on the fund.
Here are the information obtained from the advertisement.
1. The fund is invested in credit-linked securities that are rated AA at the time of issue. These credit-linked securities have a high risk than bonds with the same rating.
2. The Notes are not principal guaranteed or principal protected. There is a likelihood that the investor may not get 100% of your principal on the maturity date. This is likely to happen, as the fund pays out more than what it earns and has to incur heavy expenses (not disclosed) for distributing and managing the fund.
3. If there is a Credit Event happening to any of the 6 financial institution before the maturity date, the investor may lose part or substantially all of the invested amount.
You need to read the prospectus carefully to understand the definition of the Credit Event and the likely amount that can be lost. (I believe that this is difficult to assess, even for an expert like me).
4. There is a provision for the Issuer to redeem the Notes earlier, on or after 3 years from the Issue Date. This right is likely to be exercised, if interest rate has fallen. The investor will have to re-invest the money to earn a lower interest rate.
5. You are advised to read the prospectus and understand the investment risks and the terms. If you do not, you cannot complain later if the investment turn out to be bad.
My views: Do not invest in this product, as it has much uncertainty and the return is not attractive. It is better to invest in a government bond to earn about 3.5% per annum over the next 5 years.
You can read the following:
Structured Products - how they work
Avoid Structured Products
Ask Mr Tan
Dear Mr Tan
My risk-adverse retired father has always placed his funds in fixed deposits as they are risk-free.
I saw the advertisement in today's papers for the minibonds series 6 which pays 5.1% for 5 3/4 yrs.
These bonds seem to be relatively low risk and the returns appears good. Is there any catch? I'm considering asking my dad to transfer his funds to buy this since his fixed deposit is maturing. Can you advise?
-----------------------------
REPLY:
The Minibond series 6 pays 5.1% p.a. for 5 3/4 years. This payment comes from the principal invested in the fund, and is NOT the same as the actual return earned on the fund.
Here are the information obtained from the advertisement.
1. The fund is invested in credit-linked securities that are rated AA at the time of issue. These credit-linked securities have a high risk than bonds with the same rating.
2. The Notes are not principal guaranteed or principal protected. There is a likelihood that the investor may not get 100% of your principal on the maturity date. This is likely to happen, as the fund pays out more than what it earns and has to incur heavy expenses (not disclosed) for distributing and managing the fund.
3. If there is a Credit Event happening to any of the 6 financial institution before the maturity date, the investor may lose part or substantially all of the invested amount.
You need to read the prospectus carefully to understand the definition of the Credit Event and the likely amount that can be lost. (I believe that this is difficult to assess, even for an expert like me).
4. There is a provision for the Issuer to redeem the Notes earlier, on or after 3 years from the Issue Date. This right is likely to be exercised, if interest rate has fallen. The investor will have to re-invest the money to earn a lower interest rate.
5. You are advised to read the prospectus and understand the investment risks and the terms. If you do not, you cannot complain later if the investment turn out to be bad.
My views: Do not invest in this product, as it has much uncertainty and the return is not attractive. It is better to invest in a government bond to earn about 3.5% per annum over the next 5 years.
You can read the following:
Structured Products - how they work
Avoid Structured Products
Ask Mr Tan
Pinnacle Notes and MiniBonds
This blog was first posted on 16 July 2007
COMMENT POSTED IN MY BLOG:
Maybe you like to comment on the Minibonds and Pinnacles. Both recieved overwhelming response from the public. What I know they are products designed for people who want streams of income. The tenor is 3-5 years with step up options with higher returns.
Since they are well received they must be good. Investors don't throw away $150 mil. for each tranche for nothing. There had been quite a few tranches already.
--------------------------------
REPLY:
Can you give specific examples of the earlier series of the Minibonds and Pinnacle Notes. What price are they trading now? How well have they performed? Did they provide a good return to the investors?
I have highlighted some of the current features of these products. They contain an element of speculation and carry a risk that has not been properly assessed.
COMMENT POSTED IN MY BLOG:
Maybe you like to comment on the Minibonds and Pinnacles. Both recieved overwhelming response from the public. What I know they are products designed for people who want streams of income. The tenor is 3-5 years with step up options with higher returns.
Since they are well received they must be good. Investors don't throw away $150 mil. for each tranche for nothing. There had been quite a few tranches already.
--------------------------------
REPLY:
Can you give specific examples of the earlier series of the Minibonds and Pinnacle Notes. What price are they trading now? How well have they performed? Did they provide a good return to the investors?
I have highlighted some of the current features of these products. They contain an element of speculation and carry a risk that has not been properly assessed.
Avoid complicated products
This blog was first posted on 17 July 2007
I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.
To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.
After spending this time, the investor will still have more questions. There are still so much uncertainty.
If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.
For example, they will tell you that the risk of a credit event is small, that your investment is safe.
Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.
What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".
I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.
Lesson: Do not invest in complicated products, that you cannot understand.
If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).
I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.
To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.
After spending this time, the investor will still have more questions. There are still so much uncertainty.
If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.
For example, they will tell you that the risk of a credit event is small, that your investment is safe.
Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.
What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".
I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.
Lesson: Do not invest in complicated products, that you cannot understand.
If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).
Mini-bonds - ask MAS to investigate
Hi Mr. Tan,
Last year due to some unfortunate series of events, my parents and I decided to invest in the minibonds, which is already gone as Lehman Brother is undergoing liquidation. It is very sad, but we have to accept the loss.
REPLY
It is unfortunate that Lehman Brothers went into bankrupcy, triggering a credit event. If they had been rescued like AIG, the credit event could have been avoided.
You should write to ask MAS to investigate what happen to the mini-bonds. Although a credit event has been triggered, you should ask what really happened to the money. Who took the money when a credit event is triggered?
It seems that many investors lost their money, and someone must have made a big gain. I undersand that the money raised from the mini-bonds are actually invested in other assets and are not invested in Lehman Brothers. So, somebody must have made a big gain at the expense of the small investors.
Please ask MAS to investigate this structure on behalf of the small investors.
Last year due to some unfortunate series of events, my parents and I decided to invest in the minibonds, which is already gone as Lehman Brother is undergoing liquidation. It is very sad, but we have to accept the loss.
REPLY
It is unfortunate that Lehman Brothers went into bankrupcy, triggering a credit event. If they had been rescued like AIG, the credit event could have been avoided.
You should write to ask MAS to investigate what happen to the mini-bonds. Although a credit event has been triggered, you should ask what really happened to the money. Who took the money when a credit event is triggered?
It seems that many investors lost their money, and someone must have made a big gain. I undersand that the money raised from the mini-bonds are actually invested in other assets and are not invested in Lehman Brothers. So, somebody must have made a big gain at the expense of the small investors.
Please ask MAS to investigate this structure on behalf of the small investors.
Pinnacle Notes
Hi Mr. Tan,
I invested in Pinnacle notes series 6. The arranger is Morgan Stanley and the 6 reference entity are Bank of America, Citigroup Inc, DBS, Singtel, OCBC and UOB.
Should I continue to hold on to the notes or cash out? If I cash out now, I will get only 34.07% of our total principal. I know that the health of Morgan Stanley is crucial to the survival of this Note. With so much uncertainty in the market, is it better to take a loss now?
REPLY
In my view, and it is just my guess, Morgan Stanley will not face the same fate as Lehman Brothers. The six reference entitles appear to be all right. The rescue package being arranged by the Fed and Treasury in USA is likely to prevent other big failures. It is not worth while to sell the Pinnacle Notes at a loss of 65% at this time.
I invested in Pinnacle notes series 6. The arranger is Morgan Stanley and the 6 reference entity are Bank of America, Citigroup Inc, DBS, Singtel, OCBC and UOB.
Should I continue to hold on to the notes or cash out? If I cash out now, I will get only 34.07% of our total principal. I know that the health of Morgan Stanley is crucial to the survival of this Note. With so much uncertainty in the market, is it better to take a loss now?
REPLY
In my view, and it is just my guess, Morgan Stanley will not face the same fate as Lehman Brothers. The six reference entitles appear to be all right. The rescue package being arranged by the Fed and Treasury in USA is likely to prevent other big failures. It is not worth while to sell the Pinnacle Notes at a loss of 65% at this time.
Foreign currency exchange rates
Do not trust your bank to give you a fair exchange rate. They don't. They like to increase their profits, and that is done by charging a high spread on their customers.
If you change from foreign currency X to foreign currency Y, the bank changes your money from X to SGD and from SGD to Y. At each change, they charge a spread of about 1%. You have to pay a spread of 2% for changing from X to Y. This is too high. If you do not ask, the bank does not tell you how it is done. It applies the two spread automatically and send a statement to you. When you realise it, it is too late.
In the past, I trust my bank. Now, I don't. I always ask my bank to quote the exchange rate or interest rate to me. With the quoted rate, I can compare with the rates charged by other banks. My bank automatically gives me a competitive rate, as they are afraid when I move my business to another bank. Later, they will lose me as a customer.
You should always your bank to quote the rate to you. The relationship manager will give you the "excuse" that the rate changes every minute. This is partly true. But the real reason is that, if you do not ask, they can charge you a large spread and you will not realise it.
I hope that the Consumer Association or Monetary Authority of Singapore get the bank to adopt a code of practice that is transparent and fair to consumers.
If you change from foreign currency X to foreign currency Y, the bank changes your money from X to SGD and from SGD to Y. At each change, they charge a spread of about 1%. You have to pay a spread of 2% for changing from X to Y. This is too high. If you do not ask, the bank does not tell you how it is done. It applies the two spread automatically and send a statement to you. When you realise it, it is too late.
In the past, I trust my bank. Now, I don't. I always ask my bank to quote the exchange rate or interest rate to me. With the quoted rate, I can compare with the rates charged by other banks. My bank automatically gives me a competitive rate, as they are afraid when I move my business to another bank. Later, they will lose me as a customer.
You should always your bank to quote the rate to you. The relationship manager will give you the "excuse" that the rate changes every minute. This is partly true. But the real reason is that, if you do not ask, they can charge you a large spread and you will not realise it.
I hope that the Consumer Association or Monetary Authority of Singapore get the bank to adopt a code of practice that is transparent and fair to consumers.
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