China Daily: Regulator unaware Lehman minibonds existed

21 Feb 2009

HONG KONG: Financial services chief Chan Ka-keung told the first Legislative Council hearing on the minibonds saga Friday that he was unaware of Lehman Brothers ill-starred minibonds before the collapse of the investment bank in September.

Chan's testimony, offering the first official account of the investment debacle, drew criticism that the government is concerned only with helping financial institutions weather the financial storm, while ignoring the interests of small investors.


The Secretary for Financial Services and the Treasury said he is concerned about the turbulence in the financial market and that he's been concerned about structural investment instruments such as Accumulator, since early 2008.

Legislators at the hearing referred to a speech made by Chan last May in New York. He told his New York listeners that the roots of the sub-prime crisis arose from credit rating agencies and the system of risk control. The Lehman minibonds somehow escaped his radar. Minibonds and other Lehman-related instruments chewed up HK$20 billion involving more than 48,000 accounts.

"The earliest I knew about minibonds was after the collapse of Lehman Brothers," he testified, in response to questions from legislator James To.

Chan did not elaborate.

The regulatory bodies, the Hong Kong Monetary Authority and the Securities and Futures Commission, raised no alarm to government as financial derivatives and structural investment instruments entered a period of severe turbulence in early 2008, he said.

Chan paused before responding to a question from wholesale and retail sector legislator Vincent Fang. Chan was asked the reasons for his lack of awareness of minibonds before Lehman Brothers collapsed.

"It is impossible to have a regulatory system that ensures no single incident of irregularity can happen," he said. "The close of Lehman Brothers was all of a sudden. It was a major incident. We are determined to improve our system."

Chan, admitting that some investors were misled, said the government has "no role" in deciding whether investment products should be banned from the market.

Regulatory bodies are responsible for determining whether financial institutions have made accurate disclosures concerning financial instruments. Agents for these products have responsibility to assure the products are suitable for the market, especially for investors in positions of vulnerability.

"The role of the government is to give statutory power and resources to regulatory bodies to perform their jobs," he said.

The government is not involved in day-to-day operations of the regulatory bodies, he added.

Labour sector legislator Ip Wai-ming criticized the government for not even being aware of the minibonds until they surfaced as a huge problem.

Legislator Regina Ip said the government should ban the sale of high risk products to individuals. She pointed out banks were still selling the disaster-bound instruments as late as August.

Real estate and construction sector legislator Abraham Shek criticized Chan for giving unsatisfactory answers before the hearing.

Hearing chairman Ho Chung-tai said he is satisfied with progress of the enquiry, though he noted that Chan "was not used to giving evidence under oath".

Chan will return to give further testimony before the hearing on Tuesday.