The Hong Kong Association of Banks said it is monitoring developments involving Octave Notes, credit-linked notes issued by Morgan Stanley that have plunged in value, while lawmakers said the issue could threaten Hong Kong's financial sector.
The association has not yet discussed the issue but will keep in touch with banking and securities regulators, chairman Peter Wong Tung-shun said. The issue is very complex, Wong added.
Democratic Party legislator Kam Nai-wai yesterday called on the 16 local distributing banks to buy back the Octave Notes at their full value. A special meeting of the financial affairs panel will discuss the issue on June 11.
``This is really a time bomb,'' Kam said.
Eight thousand Hongkongers invested a total of about HK$2 billion in Octave Notes, which invested in synthetic collateralized debt obligations.
``There has been mis-selling,'' said Peter Chan Kwong-yue, chairman of the Alliance of Lehman Brothers Victims. The product's name in Chinese is ``Smart Bond.''
``The translation is intentionally misleading,'' Chan said. ``They promoted Octave Notes very much the same as minibonds.''
Octave Notes Series 10, 11 and 12 used Lehman Brothers as a reference entity and are now worthless.
Some other series used bonds issued by collapsed institutions like Icelandic banks and Canadian papermaker Abitibi-Consolidated as a reference and are now worth less than 1 percent of their original value.
Dah Sing Banking Group managing director Derek Wong Hon-hing said Dah Sing Bank sold a ``very small amount'' of Octave Notes and has received ``very few complaints.''
The bank has kept in touch with those customers and will follow up on a case-by-case basis, Wong said.
A 54-year-old housewife, who gave her name as Chan, said she walked into her bank to update her passbook and before she left had been convinced to buy Octave Notes Series 11.
Chan said she lost HK$400,000 of her husband's money on the investment, which is now worth nothing, and is afraid to tell him lest he divorce her.
She said she has been seeking mental help because she is so distressed about the issue.
``I didn't think the bank would cheat me,'' she said. ``I hate the bank; I hate the government.''
Monday, June 1, 2009
It is easy to be cheated (3) - Credit linked notes
Many retail investors have lost large sums of money by investing in the credit linked notes, such as the minibonds, pinnacle notes, high notes and the jubilee notes.
Several financial institutions sold these credit-linked notes to their customers. The customers were told that their monies were invested in a basket of bonds issued by highed rated companies. The chance of failure of any of these reference entities was small, and even if it materialises, their loss will only be a proportion of the invested capital, due to the diversification of the risk.
This turned out to be an incorrect description of the actual nature of the notes. The invested capital was actually used to provide the security for credit default swaps on the reference entities. If any of these entities failed, the entire capital would be lost. Instead of diversifying the risk of failure, they are taking six to eight times of the risk of failure of any single entity.
The capital was actually invested in other assets that carry their own credit risk. This adds to the total risk of loss of the capital.
The actual structure of these notes were contained in several hundred of pages of a prospectus and pricing statments. The documentation was not clear, even to knowledgeable financial experts who spent many hours to read them. Many people feel that these documents are written to conceal the real nature of the structured products.
The actual return received by the product issuer was considerably higher (due to the extremely high risk) than the yield of 5% given to the retail investors. These excess gain was earned by the issuers but was not disclosed in any documentation. There were several devices created to hide or siphon off these profits.
Due to the global recession, many credit linked notes failed, causing severe losses to the retail investors. The dishonest act was in the creation of these products, attempts made to hide the true nature of the risks and to siphon off the excess return to the product issuer.
Most distributors of these products were not aware about the true nature of the products and had negligently misrepresent the products as being safe for retail investors. They were only focused on generating large volume of sales to earn an attractive rate of commission.
To avoid being cheated, it is important for retail investors to avoid all types of structured products, especially in an regulatory environment that is weak in protecting retail investors.
Tan Kin Lian
Logic Quiz 4-2 (Vol 4)
There are four houses with different colours in a row. Each occupant plays a different instrument and keeps a different pet.
2. The salesman lives left of the teacher.
3. The manager keeps maltese.
4. The bass player lives in the red house.
5. The brown house is the first house.
6. The drum player keeps maltese.
7. The flute player lives in the third house.
8. The schnauzer owner lives in the yellow house.
9. The teacher keeps pekingese.
10. The lawyer plays guitar.
Question: Who keeps pomeranian?
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