Monday, October 6, 2008

Credit default swaps - who benefits?

Someone should me a chart showing the cost of credit default swaps. Before the financial crisis, the swap rate is at average of 100 bps p.a. for well rated companies. If the structured product sells the swap to insure 6 entities, the total payout is 6% p.a. The money received from the investors were invested in CDOs and low quality bonds, which are likely to earn another 6% p.a. (this is my estimate).

It is possible that the structured product could earn up to 12% p.a. But, this is not the return given to the investors. They are given a low return of about 5% p.a. The question is, "where does the rest of the money go"? I suspect that they are taken away as charges for distribution and profit. There amounts are not disclosed to the investors.

The figures indicated by me are estimates and may not be accurate. It will be better to look at the actual figures. So far, the trustee or the arranger are not disclosing these figures. Perhaps the authority can step in and ask for these figures to be disclosed.

Even if the actual figures are lower than my estimates, there is still a question whether the charges are reasonable or excessive, and whether there is any breach of fiduciary duty.

Coordinated interest rate cuts

There is speculation in the financial markets that the central banks will have a coordinated interest rate cut to help the financial markets.

The chance of this happening is high. Inflation has dropped. Economies are entering into a recession, which will bring down inflationary pressures. The coordinated action means that several countries will be cutting interest rate together, at almost the same time.

Over the longer term, the global financial system needs to be revamped. It is bad to have extremely high leverage. There must be controls over the amount of debt that businesses are allowed to pile up. The control has to be stricter for financial institutions.

Reduced bonus under Income policies

Dear Mr. Tan,

With the fall in the global stockmarket, should I cancel my NTUC policies and take out the cash value. The bonus was cut this year. Can I ask NTUC to keep its promise and pay the higher bonus before the cut?

REPLY
If you decide to surrender the Income policy, you will get the cash value that is not less than the cash value before the bonus cut. Income has promised that they will declare a higher rate of special bonus for the current year that will compensate for the cut in the annual bonus. This guarantee is valid for the current one or two years only (I am not sure about the duration).

In the future years, there is no such guarantee. If the special bonus is cut, you will suffer a reduction in cash value, due to the lower rate of annual bonus. If you do not need the life insurance protection, it is better to surrender the policies now, and take out the cash value.

I am likely (but have not made a final decision) to surrender my existing policies, so that it wil lnot be affected by the lower rates of bonus in the future.

Dividend under STI ETF

Hi Tan Kin Lian,
It is clear to me that any index ETF tracks the underlying index. However, index itself will have dividend yield (let's say 3%), which I believe is significant.

If so, in the ideal circumstances ETF performance shall have to beindex + dividend yield.
Does ETF price reflect the dividend yield of the index? Where does the dividend of index go?

REPLY
If you invest in the STI ETF by StateStreet, the dividend is paid out in half yearly distributions.

Credit default swap

Documentary on CDS :
http://www.cbsnews.com/video/watch/?id=4502673n

Full particulars of investors of credit linked securities

I wish to collect full particulars of investors to be submitted to the Monetary Authority of Singapore - including age, language, contact information, amount invested, type of structured product and distributor. Complete information has to be provided this time.

If you wish to provide the information, please click here: http://www.petitiononline.com/PICLS2/petition.html

---------------------------------

Update:
I have collected sufficient information and will close this "petition" now.

Someone asked me to state what the particulars are to be used for. A senior person in MAS asked me if I have information about older people, especially those that are not literate in English, who have been asked to invest in these structured products. This is why I have asked for age, language and occupation. I am not sure at this time, if this information will be helpful to get MAS to take a pro-active stand.

Hong kong - minibond buyback proposal

http://www.thestandard.com.hk/breaking_news_detail.asp?id=7315&icid=1&d_str=20081006

Minibond buyback proposal
Financial Secretary John Tsang Chun-wah said the government has proposed that banks to buy back Lehman Brothers minibonds from customers.

''This is a way to let investors recoup some losses from their investments quickly,'' Tsang said.

The trustee of the minibonds, HSBC (0005), has agreed to disclose more information to distributors such as the value of the underlying collateral on the investment products.

Investors are unlikely to get back all their investment, he said.

Earlier today, more than 200 people who invested in the finanical products sought help from the police. The group staged a protest outside the police headquarters in Wan Chai and Democratic Party members accompanied several of them to file complaints with the Commercial Crime Bureau that salesmen had misled them.

File a police report

A lawyer suggested that investors should file a police report against the representative (of the distributor) who misled them into buying the structured product. Several investors can file the report together. This will get the police to investigate and act.

http://tankinlian.blogspot.com/2008/09/have-you-been-cheated.html

In Hongkong, the investors have filed a police report and the police have started investigation.

Securities Investors Association of Singapore (SIAS)

I like to ask investors to approach the Securities Investors Assocation of Singapore (SIAS) and see if SIAS is able to help take up this matter collectively.

http://www.sias.org.sg/

Consumer Association

I like to ask investors to approach the Consumer Association and ask CASE to take up this matter on your behalf. I hope that CASE will be willing to act. You can try CASE as an additional channel.

http://www.case.org.sg/

Collective Action against specific distributors

I have received several requests to help identify investors of specific products so that they can get together to take collective action.

I need to have volunteers who are willing to take the lead to act against specific distributors. If you are willing to volunteer, send an email to kinlian@gmail.com.

Please provide the following:
1. Your name
2. Your email address
3. Your telephone number
4. The specific distrbutor

I will provide you the particulars of the investors who bought from that specific distributor. You have to contact them, talk to them, arrange meetings and find a lawyer. If this work is too heavy for you, you can get a few volunteers from the list to help you.

If you wish to arrange meetings, you can send details for me to post in my blog.

The people who signed the Petition bought from the following distributors:

Maybank 305
Hong Leong 245
DBS 145
ABN 116
Philips 55
OCBC 53
UOB 40
CIMB 14
GYC 12
SCB 10
Citibank 10
Amex 10
Kim Eng 7
HSBC 7
Alpha 7

Unable to give individual advice or attend to individual requests

I wish to remind visitors to my blog that I am not able to:

> give individual advice
> attend to individual request

I received about 50 emails every day on the financial crisis, including many emails that concern individual situations. Please do not send me your individual problem, as I do not have the time to read and advice you.

Please read my blog for update.

Monetary Authority of Singapore - Consumer Complaint

If you wish to lodge a complaint against an agent or a financial institution, you can refer to this guide in MAS website:

http://www.moneysense.gov.sg/contact_us/Consumer_Portal_Contact_Us.html#

Here is an extract from the webpage:

(IV) REPORTING A MATTER TO MAS

As the financial sector regulator, MAS' role is to ensure that financial institutions conduct their businesses in an appropriate manner and in accordance with the law. MAS is not able to resolve commercial disputes between you and your financial institution, or order the financial institution to pay compensation to you. We are, however, interested in matters that may raise issues of supervisory concern. These include violations of our rules and regulations, and breaches of other relevant codes of practice and guidelines.

MAS can...
Investigate wrongdoings by financial institutions (e.g. market misconduct like giving inappropriate or misleading advice, misrepresentation and lack of disclosure).
Take regulatory action against financial institutions that have breached our rules and regulations.

MAS cannot...
Intervene in matters relating to service standards, commercial decisions such as pricing policies of financial institutions, contractual arrangements and civil disputes.
Give legal advice or comment on cases that have been heard in court, adjudicated by FIDReC or are pending legal action.
Order financial institutions to compensate you.
Disclose the outcome of any investigations or actions taken against individual financial institutions.

If you wish to report a problem you have with your financial institution, please click here or write to
Monetary Authority of Singapore
Consumer Issues Division
Capital Markets Department
10 Shenton Way
MAS Building
Singapore 079117

Fax : (65) 6225-9766