Why the credit linked notes are highly risky

Some anonymous postings claimed that the structured products are linked to six entities that are rated A or higher at the time of issue, and are therefore safe. Nobody could have forseen that these companies could get into bankrupcy.

This argument is not correct. These structured products are highly risky for the following reasons:

1. The structured products take a bet on the six reference entities. The failure (or credit event) on any one entity could cause the loss of the entire capital. The presence of six entities (i.e. swaps) increases the risk six-fold.

2. The money received under the structure is invested in lower quality assets, such as collateralised debt obligations (CDO) to earn a high rate of return. Additional bets (i.e. swaps) could be taken on the failures of these underlying assets.

I estimate that the income stream of the structure could be 10% or more each year. If so, this will classify the structure as a junk bond, which is highly risky. However, it seems that only 5% is given to the investors for the high risk that they are shouldering.

These figures are just my guess. I hope that the Monetary Authority of Singapore will carry out the investigation, as asked by the Petition, to will look into the actual accounts of the structure, i.e. the income stream, the expenses and profits that are taken out, and if the parties had observed their fiduciary duty to the investors.