Hi Mr. Tan,
Structured products are essentially investment instruments engineered by so called "financial engineers" using complex mathematical models (models which works 9 out of 10 years, and the other 1 year, it blows up spectacularly).
These products almost always results in the investor underwriting/selling an financial options or insurance in exchange for an small fixed premium, (e.g. dual currency account, mini-bonds insuring credit events). This is the main reason I have been avoiding RMs (i.e relationship managers) marketing their structured products, i.e. I don't want to underwrite a huge risk for a small premium.
Let me elaborate on why individual investors should never sell/"underwrite" financial options/insurance:
- the losses can be catastrophic to the investor in return for a small fixed return eg something happens, your losses are very high and nothing happens, your return is just 3% more.. individuals simply do not have the capacity to take on such risks (evidently even AIG don't)
- the general public simply do not have the neccesary training/finance knowledge to understand these products and the risks involved.. those that do, probably won't invest in them..
- financial markets have a very high correlation during extreme events, diminishing the effects of diversification
- banks also have an incentive to push these products, because there is a lot of demand for financial options/insurance from hedge funds, banks, investment-banks. Effectively, these financial insurances are underwritten by the unsuspecting public and subsequently passed to the bank's clients. The bank made a spread or fee from both sides and the RM made a nice commission.
MAS failed in regulating these practices, and the banks and RMs put the life savings of investors at risk because of their own fat pockets.
I urge the financial journalists to find out:
- what proportion of bankers, RMs actually invested in these structured products (putting their own money where their mouth is)?
- where has the losses gone too?
Come on, guys at ST put your journalist professionalism and critical thinking to use!!
ym
Saturday, September 20, 2008
Loss of hard earned money
Dear Mr. Tan
I am also hit by DBS High Notes 5 (ST Sept 18 news). My relationship manager persuaded me to have lunch and showed me the product. He reinterated that it was a very safe investments as all the fund principals are all A rated.
I signed for $X. As I was busy, I trusted him and signed on the form. When Lehman's bankruptcy appeared in the news, I immediately called the relationship manager and was shocked to be informed that there will be zero payout.
I was not told about this and was only shown a copy of the prospectus but not given one. I would be grateful if you could advise me where can I make a complaint.
REPLY
You can lodge a complaint with MAS.Your complaint is about the conduct of the adviser (i.e relationship manager of the bank) for failing to disclose proper explanation about the product. Read my blog:
http://tankinlian.blogspot.com/2008/09/monetary-authority-of-singapore.html
Dear Mr. Tan,
I applaud your determination to help us, the helpless and disappointed investors who have dumped in thousands of dollars of our hard earned money into High Note 5. I hope MAS will take actions against the bank and its employees.
I am also hit by DBS High Notes 5 (ST Sept 18 news). My relationship manager persuaded me to have lunch and showed me the product. He reinterated that it was a very safe investments as all the fund principals are all A rated.
I signed for $X. As I was busy, I trusted him and signed on the form. When Lehman's bankruptcy appeared in the news, I immediately called the relationship manager and was shocked to be informed that there will be zero payout.
I was not told about this and was only shown a copy of the prospectus but not given one. I would be grateful if you could advise me where can I make a complaint.
REPLY
You can lodge a complaint with MAS.Your complaint is about the conduct of the adviser (i.e relationship manager of the bank) for failing to disclose proper explanation about the product. Read my blog:
http://tankinlian.blogspot.com/2008/09/monetary-authority-of-singapore.html
Dear Mr. Tan,
I applaud your determination to help us, the helpless and disappointed investors who have dumped in thousands of dollars of our hard earned money into High Note 5. I hope MAS will take actions against the bank and its employees.
A flawed global financial system
During the Asian Financial Crisis in 1998, the global fund managers had a great time in selling short in the equity and currency markets. They made huge profits. The leaders in the developed countries said that the Asian economies deserve to be punished for their lax economic policies.
Now, the table has turned. It is the developed countries that are now suffering from short selling. What do the leaders say now? Short selling is bad and has to be stopped.
Wow. Double standard! What a hypocritical world.
My conclusion is that the global financial system is flawed and need to be changed. I agree with the posting by "ym" on the flaws of the "fractional banking system". Banks should not be allowed to create money on their own.
Now, the table has turned. It is the developed countries that are now suffering from short selling. What do the leaders say now? Short selling is bad and has to be stopped.
Wow. Double standard! What a hypocritical world.
My conclusion is that the global financial system is flawed and need to be changed. I agree with the posting by "ym" on the flaws of the "fractional banking system". Banks should not be allowed to create money on their own.
Book on Financial Planning
I will try to find the time to write a book on Financial Planning. The topics in this book are:
Chapter
1 Introduction
2 How much life insurance do you need?
3. What type of life insurance policy?
4. How to invest savings?
5. Investing in a unit trust
6. Investing on your own
7. Why avoid high commission products?
8. Saving for a child’s education
9. Insuring against medical expenses, disability
10. Structured investment products
11. Investment tips for a retiree
12. Life annuity
13. Government sponsored insurance schemes
14. Use of credit cards
15. Loans (mortgage, car, study)
16. Investing in property
17. Taxation
18. Leaving assets for your descendents
19. Conclusion
Chapter
1 Introduction
2 How much life insurance do you need?
3. What type of life insurance policy?
4. How to invest savings?
5. Investing in a unit trust
6. Investing on your own
7. Why avoid high commission products?
8. Saving for a child’s education
9. Insuring against medical expenses, disability
10. Structured investment products
11. Investment tips for a retiree
12. Life annuity
13. Government sponsored insurance schemes
14. Use of credit cards
15. Loans (mortgage, car, study)
16. Investing in property
17. Taxation
18. Leaving assets for your descendents
19. Conclusion
Biggest gamble in history - Credit default swaps
http://www.time.com/time/business/article/0,8599,1723152,00.html
Size of market
Credit default swap - USD 45 trillion
Stock market - USD 22 trillion
Housing market (mortgages) - USD 7 trillion
US Treasuries - USD 4 trillion
Size of market
Credit default swap - USD 45 trillion
Stock market - USD 22 trillion
Housing market (mortgages) - USD 7 trillion
US Treasuries - USD 4 trillion
Singapore banks and short selling
Dear Mr. Tan,
I always thought that putting my lifetime savings in a bank to earn interest is safe. The recent crisis in US and news about Lehman Bros and AIG is disturbing. I begin to wonder how safe is our Singapore banks and which of the three banks is the safest of all? Why are we protected only on $20,000 on each account?
The Straits Times article about the Minibond series 3 is enlightening. I was offered this product which was sold as a bond. I stayed clear because I had a bad experience of structured deposit sold by bank. What worries me is that the bank and financial adviser also claimed that they were also mislead.
Retail customers transact with a bank based on trust that they are reliable and expert in financial product. Can anyone enlighten me what is the role and ethic of the bank?
In US, the government has banned short selling in their stock market to salvage the crisis. The relevant authorities acknowledge the negative effect of short selling. In Singapore short selling is allowed too.
The financial adviser told me that buying equities is about investment. The unfolding of the recent event in US and our stock market make me think otherwise. Buying equities is not an investment when short selling is involved. SGX has tried to take measures by allowing short sell on borrowed shares. Short-sell will make the price go up or down. Can thus be considered as genuine market force of supply and demand?
Let me try to visualise the Lehman scenario as a layman. For example, there are 1 million genuine Lehman share, but because of short selling, 10 million Lehman share were artificially created in the stock market and sold down. I hope in the near future all forms of short selling should be banned from sensitive equities, such as financial, banking and insurance equities.
I would appreciate if you can comments how safe and resilent is our local bank to the recent unfolding crisis in US.
REPLY
I think that the Singapore banks are quite safe. Even in America, the large banks dealing with the public are quite safe. They are monitored by the Fed.
The banks that got into trouble are the investment banks, which were highly leveraged and not controlled by the Fed.
I always thought that putting my lifetime savings in a bank to earn interest is safe. The recent crisis in US and news about Lehman Bros and AIG is disturbing. I begin to wonder how safe is our Singapore banks and which of the three banks is the safest of all? Why are we protected only on $20,000 on each account?
The Straits Times article about the Minibond series 3 is enlightening. I was offered this product which was sold as a bond. I stayed clear because I had a bad experience of structured deposit sold by bank. What worries me is that the bank and financial adviser also claimed that they were also mislead.
Retail customers transact with a bank based on trust that they are reliable and expert in financial product. Can anyone enlighten me what is the role and ethic of the bank?
In US, the government has banned short selling in their stock market to salvage the crisis. The relevant authorities acknowledge the negative effect of short selling. In Singapore short selling is allowed too.
The financial adviser told me that buying equities is about investment. The unfolding of the recent event in US and our stock market make me think otherwise. Buying equities is not an investment when short selling is involved. SGX has tried to take measures by allowing short sell on borrowed shares. Short-sell will make the price go up or down. Can thus be considered as genuine market force of supply and demand?
Let me try to visualise the Lehman scenario as a layman. For example, there are 1 million genuine Lehman share, but because of short selling, 10 million Lehman share were artificially created in the stock market and sold down. I hope in the near future all forms of short selling should be banned from sensitive equities, such as financial, banking and insurance equities.
I would appreciate if you can comments how safe and resilent is our local bank to the recent unfolding crisis in US.
REPLY
I think that the Singapore banks are quite safe. Even in America, the large banks dealing with the public are quite safe. They are monitored by the Fed.
The banks that got into trouble are the investment banks, which were highly leveraged and not controlled by the Fed.
Credit Default Swaps (CDS)
AIG lost a few tens of billions in Credit Default Swaps. Here is an explanation in Wikipedia.
A credit default swap (CDS) is a contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default or "credit event" in respect of a third party or "reference entity".
If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").
A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.
http://en.wikipedia.org/wiki/Credit_default_swap
A credit default swap (CDS) is a contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default or "credit event" in respect of a third party or "reference entity".
If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").
A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.
http://en.wikipedia.org/wiki/Credit_default_swap
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