I watched a TV program. It featured a worker earning $2 a day in a poor country. The worker said, that the $2 was additional income to the family, who depended on farming as their primary livelihood. Although they are poor, they do not have any financial stress, as they have low cost of living.
I recall the conditions of Singapore in the 1960s and 1970s. HDB flats were sold for $15,000 to $35,000, representing about two years of average earnings. Most people could find jobs that paid sufficient wages to pay their flats, accumulate savings in the CPF and live comfortably as long as they are willing to work. They have better financial security.
The financial condition worsened after 1980 when public housing was allowed to appreciate under the "asset enhancement" policy. It is now a financial burden to buy a modest HDB flat which has to be paid with a high proportion of the earnings when jobs are no longer secure. This has caused a lot of financial stress.
I believe that it is possible to rebuild a new economic structure that gives more financial security and less financial stress.
Tan Kin Lian
Wednesday, February 10, 2010
Improve the business practices
Somebody attacked me for "lambasting" the practices of banks and insurance companies after I "left the industry".
I believe that banks and insurance companies can play a useful role in the economy. They should adopt good and fair practices, which they had done in past years.
In recent years, several bad practices had taken root in the relentless drive for bigger profits. Some of these practices were unfair and unethical, and could even be illegal (if the authority were to take action). My purpose is to point out these bad practices, so that the practitioners will realize the difference between good and bad, right and wrong.
A few cynics also attacked me for being idealistic. I do not post their comments. If they dislike the views expressed in this blog, they are not required to visit this blog. If they wish to express their views, they can do so without attacking me personally or attacking my views.
I wish to point out one specific good practice. A few months ago, Great Esatern Life, with the approval of their parent OCBC Bank, decided to give 100% refund to the investors of their investment linked product that had were invested in structures similar to the Pinnacle Notes. Many investors accepted the refund offer, and were relieved of the stress of watching the value of the notes drop, as more entities entered into default. This move caused several hundred million dollars to Great Eastern Life and OCBC Bank, but were appreciated by the policyholders.
Tan Kin Lian
I believe that banks and insurance companies can play a useful role in the economy. They should adopt good and fair practices, which they had done in past years.
In recent years, several bad practices had taken root in the relentless drive for bigger profits. Some of these practices were unfair and unethical, and could even be illegal (if the authority were to take action). My purpose is to point out these bad practices, so that the practitioners will realize the difference between good and bad, right and wrong.
A few cynics also attacked me for being idealistic. I do not post their comments. If they dislike the views expressed in this blog, they are not required to visit this blog. If they wish to express their views, they can do so without attacking me personally or attacking my views.
I wish to point out one specific good practice. A few months ago, Great Esatern Life, with the approval of their parent OCBC Bank, decided to give 100% refund to the investors of their investment linked product that had were invested in structures similar to the Pinnacle Notes. Many investors accepted the refund offer, and were relieved of the stress of watching the value of the notes drop, as more entities entered into default. This move caused several hundred million dollars to Great Eastern Life and OCBC Bank, but were appreciated by the policyholders.
Tan Kin Lian
High interest rate on bank borrowings
I know of a person who runs a small business. Due to the economic slowdown, his income was reduced, but his family expenses continued to be high. He had to use an bank overdraft secured on a second mortgage of his house. This overdraft accumulated to $50,000 within two years. He had to pay a high interest rate of 2% a month on the overdraft. The interest cost him $1,000 a month. It was a burden to him, as his income stream has not recovered.
Fortunately for him, he was able to approach a family member for financial assistance to pay off the overdraft, saving him $1,000 a month. Instead, he paid $1,000 a month to repay the loan, free of interest. In this way, he would be able to repay the loan within four years.
The bank pays interest at 0.5% per annum to depositors and charge 24% per annum on loans to borrowers - secured on a second mortgage. It seems that this bank is exploiting the desperation of people who have to borrow to meet their living expenses.
Tan Kin Lian
Fortunately for him, he was able to approach a family member for financial assistance to pay off the overdraft, saving him $1,000 a month. Instead, he paid $1,000 a month to repay the loan, free of interest. In this way, he would be able to repay the loan within four years.
The bank pays interest at 0.5% per annum to depositors and charge 24% per annum on loans to borrowers - secured on a second mortgage. It seems that this bank is exploiting the desperation of people who have to borrow to meet their living expenses.
Tan Kin Lian
Large fee paid to swap counter-party
Dear Mr Tan,
I received the letter from HSBC on the recovery value of my Minibond Series 5. I am shocked by the huge fee paid to Lehmen LBSF for the settlement fee. The letter has these figures:
Series 5
Proceeds from liquidation – 82.30% (100% = principal amount)
Cost at underlying level – 0.47%
Swap payment to LBSF – 50.81%
Receivers fees – 0.38%
Legal fees – 0.48%
Other costs – 0.31%
Net proceeds to noteholders – 29.85%
A whopping 50.81% or $35 million is paid to LBSF.
Another friend, who has Series 10 has a liquidation value pf 104% but reduced by 41% fee to LBSF:
Series 10
Proceeds from liquidation – 104.04% (100% = principal amount)
Swap payment to LBSF – 40.60%
Receivers fees – 0.42%
Legal fees – 0.26%
Other costs – 0.33%
Net proceeds to noteholders – 62.43%
It is not true as reported in papers that some series has low recovery value due to nature of underlying assets or long maturity. The fact is huge fee has been paid to LBSF. Is this why Australia’s Lehman notes have been able to recover 85-95% instead (recently reported in your blog)? I feel HSBC and Receivers have failed the noteholders - a total of $200+ million has probably been paid to LBSF for this unfair settlement.
Mr Tan, do you think the large settlement fees to LBSF is fair? Thank you.
REPLY
I cannot understand why a large payment has to be given to the swap counterparty. I suggest that, as an investor, you ask the trustee on why the payment to the swap counterparty is so large. Maybe, you can get a few investors to join you in making a joint request.
FURTHER COMMENT
The swap is to take over the risk of default of the reference entities during the remainder of the contract. I believe that most of the reference entities are now quite secure, after the recovery of the global economy and markets. I am therefore surprised to find a large payment to take off the swap.
I think that the investors should ask the trustees to account fOR their decision to make this large payment, and ensure that it is in the commercial interest of the investors to accept this transaction.
I thought that the Monetary Authority of Singapore is monitoring this transaction, so they may have some information that may be helpful. We have to see if they make any statement on this matter.
I wish that we have a more active Parliament, similar to Hong Kong, where the legislators can ask questions, so that a clear explanation can be given to the public.
I received the letter from HSBC on the recovery value of my Minibond Series 5. I am shocked by the huge fee paid to Lehmen LBSF for the settlement fee. The letter has these figures:
Series 5
Proceeds from liquidation – 82.30% (100% = principal amount)
Cost at underlying level – 0.47%
Swap payment to LBSF – 50.81%
Receivers fees – 0.38%
Legal fees – 0.48%
Other costs – 0.31%
Net proceeds to noteholders – 29.85%
A whopping 50.81% or $35 million is paid to LBSF.
Another friend, who has Series 10 has a liquidation value pf 104% but reduced by 41% fee to LBSF:
Series 10
Proceeds from liquidation – 104.04% (100% = principal amount)
Swap payment to LBSF – 40.60%
Receivers fees – 0.42%
Legal fees – 0.26%
Other costs – 0.33%
Net proceeds to noteholders – 62.43%
It is not true as reported in papers that some series has low recovery value due to nature of underlying assets or long maturity. The fact is huge fee has been paid to LBSF. Is this why Australia’s Lehman notes have been able to recover 85-95% instead (recently reported in your blog)? I feel HSBC and Receivers have failed the noteholders - a total of $200+ million has probably been paid to LBSF for this unfair settlement.
Mr Tan, do you think the large settlement fees to LBSF is fair? Thank you.
REPLY
I cannot understand why a large payment has to be given to the swap counterparty. I suggest that, as an investor, you ask the trustee on why the payment to the swap counterparty is so large. Maybe, you can get a few investors to join you in making a joint request.
FURTHER COMMENT
The swap is to take over the risk of default of the reference entities during the remainder of the contract. I believe that most of the reference entities are now quite secure, after the recovery of the global economy and markets. I am therefore surprised to find a large payment to take off the swap.
I think that the investors should ask the trustees to account fOR their decision to make this large payment, and ensure that it is in the commercial interest of the investors to accept this transaction.
I thought that the Monetary Authority of Singapore is monitoring this transaction, so they may have some information that may be helpful. We have to see if they make any statement on this matter.
I wish that we have a more active Parliament, similar to Hong Kong, where the legislators can ask questions, so that a clear explanation can be given to the public.
Pension hit by lower investment returns
The low investment return has hit the retirement income of retirees. Read this article.
Discount on books for February 2009
A few customers bought several copies of the Practical Guide for Financial Planning. They may be giving to their children or friends, or may be buying on behalf of friends.
If you wish to buy the books at a discount of 15% (Promotion Code - BLOG), do so during February. The promotion will end on 28 February. The promotion applies to all the books and the rechargeable torchlight shown in the Internet Shop. The Shape Quiz book contains 100 challenging shape puzzles which can give hours of fun for children, adults and seniors. It trains their mind to be flexible and see out of the box. It is an important skill.
Click here.
If you wish to buy the books at a discount of 15% (Promotion Code - BLOG), do so during February. The promotion will end on 28 February. The promotion applies to all the books and the rechargeable torchlight shown in the Internet Shop. The Shape Quiz book contains 100 challenging shape puzzles which can give hours of fun for children, adults and seniors. It trains their mind to be flexible and see out of the box. It is an important skill.
Click here.
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