SCMP:400 investors lose millions in echo of minibonds scandal

30 May 2009

In a disturbing echo of the Lehman minibonds scandal, the Hong Kong Monetary Authority has received more than 400 complaints from people who have lost hundreds of millions of dollars on a complex credit-linked product designed and sold by US investment bank Morgan Stanley.

The bank sold HK$2.1 billion of the products, called Octave notes, through 16 local retail banks, including ABN Amro, Bank of China (Hong Kong) and Wing Lung, between 2004 and 2007. Eighteen series of the notes were sold, of which 10 have lost more than 90 per cent of their value. Three - series 10, 11 and 12 - are worthless.

The HKMA revealed the complaints yesterday. It said the banks had sold the Octave notes to about 8,300 customers.

Lawmaker Regina Ip Lau Suk-yee called yesterday for much stronger regulation of financial products sold to retail investors.

She said she had been contacted by people who had suffered big losses on the Morgan Stanley products but had not understood their nature. "The people who have contacted me are ordinary grass-roots people. They are not wealthy," she said.

Like most minibonds, the Octave notes contain synthetic collateralised debt obligations (CDOs), which in the United States and Europe are sold only to professional investors.

"They [Octave investors] sounded very similar to the Lehman investors, who didn't know the products they bought were so risky," Mrs Ip said.

Some 48,000 Hongkongers lost most of the HK$20 billion they invested in minibonds issued or guaranteed by Lehman Brothers when the bank collapsed in September.

Synthetic CDOs are complex, conceptual products that mimic the financial health of a pool of companies. When businesses collapse, the CDOs lose value. Many of the Octave notes are virtually worthless because they were connected to the financial performance of firms that went bust.

Information that Morgan Stanley has posted on a dedicated Octave website illustrates the toxic mess.

Octave series 21, for example, is now worth 0.37 HK cents per dollar invested. It contained a CDO linked to the financial performance of some very troubled companies. These include Icelandic bank Glitnir, which collapsed in October, and US carmaker Chrysler, which entered bankruptcy protection on April 30. Notes that were priced at a fraction of their original value had a high chance of becoming worthless soon, informed sources said.

Only one Octave note is trading at anything approaching a healthy valuation. Series one, issued in 2004, is priced at 68 HK cents per dollar invested.

A spokesman for the regulator said it had taken steps to stop such a debacle recurring. "The HKMA has taken a number of steps, including the issuance of circulars and reminders, to ensure that banks implement adequate measures to manage the risks associated with retail investment products," he said.

The regulator has also asked banks to keep their relationship managers well briefed so they can handle customer inquiries.