http://www.time.com/time/business/article/0,8599,1723152,00.html
Size of market
Credit default swap - USD 45 trillion
Stock market - USD 22 trillion
Housing market (mortgages) - USD 7 trillion
US Treasuries - USD 4 trillion
Saturday, September 20, 2008
Singapore banks and short selling
Dear Mr. Tan,
I always thought that putting my lifetime savings in a bank to earn interest is safe. The recent crisis in US and news about Lehman Bros and AIG is disturbing. I begin to wonder how safe is our Singapore banks and which of the three banks is the safest of all? Why are we protected only on $20,000 on each account?
The Straits Times article about the Minibond series 3 is enlightening. I was offered this product which was sold as a bond. I stayed clear because I had a bad experience of structured deposit sold by bank. What worries me is that the bank and financial adviser also claimed that they were also mislead.
Retail customers transact with a bank based on trust that they are reliable and expert in financial product. Can anyone enlighten me what is the role and ethic of the bank?
In US, the government has banned short selling in their stock market to salvage the crisis. The relevant authorities acknowledge the negative effect of short selling. In Singapore short selling is allowed too.
The financial adviser told me that buying equities is about investment. The unfolding of the recent event in US and our stock market make me think otherwise. Buying equities is not an investment when short selling is involved. SGX has tried to take measures by allowing short sell on borrowed shares. Short-sell will make the price go up or down. Can thus be considered as genuine market force of supply and demand?
Let me try to visualise the Lehman scenario as a layman. For example, there are 1 million genuine Lehman share, but because of short selling, 10 million Lehman share were artificially created in the stock market and sold down. I hope in the near future all forms of short selling should be banned from sensitive equities, such as financial, banking and insurance equities.
I would appreciate if you can comments how safe and resilent is our local bank to the recent unfolding crisis in US.
REPLY
I think that the Singapore banks are quite safe. Even in America, the large banks dealing with the public are quite safe. They are monitored by the Fed.
The banks that got into trouble are the investment banks, which were highly leveraged and not controlled by the Fed.
I always thought that putting my lifetime savings in a bank to earn interest is safe. The recent crisis in US and news about Lehman Bros and AIG is disturbing. I begin to wonder how safe is our Singapore banks and which of the three banks is the safest of all? Why are we protected only on $20,000 on each account?
The Straits Times article about the Minibond series 3 is enlightening. I was offered this product which was sold as a bond. I stayed clear because I had a bad experience of structured deposit sold by bank. What worries me is that the bank and financial adviser also claimed that they were also mislead.
Retail customers transact with a bank based on trust that they are reliable and expert in financial product. Can anyone enlighten me what is the role and ethic of the bank?
In US, the government has banned short selling in their stock market to salvage the crisis. The relevant authorities acknowledge the negative effect of short selling. In Singapore short selling is allowed too.
The financial adviser told me that buying equities is about investment. The unfolding of the recent event in US and our stock market make me think otherwise. Buying equities is not an investment when short selling is involved. SGX has tried to take measures by allowing short sell on borrowed shares. Short-sell will make the price go up or down. Can thus be considered as genuine market force of supply and demand?
Let me try to visualise the Lehman scenario as a layman. For example, there are 1 million genuine Lehman share, but because of short selling, 10 million Lehman share were artificially created in the stock market and sold down. I hope in the near future all forms of short selling should be banned from sensitive equities, such as financial, banking and insurance equities.
I would appreciate if you can comments how safe and resilent is our local bank to the recent unfolding crisis in US.
REPLY
I think that the Singapore banks are quite safe. Even in America, the large banks dealing with the public are quite safe. They are monitored by the Fed.
The banks that got into trouble are the investment banks, which were highly leveraged and not controlled by the Fed.
Credit Default Swaps (CDS)
AIG lost a few tens of billions in Credit Default Swaps. Here is an explanation in Wikipedia.
A credit default swap (CDS) is a contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default or "credit event" in respect of a third party or "reference entity".
If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").
A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.
http://en.wikipedia.org/wiki/Credit_default_swap
A credit default swap (CDS) is a contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default or "credit event" in respect of a third party or "reference entity".
If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").
A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.
http://en.wikipedia.org/wiki/Credit_default_swap
Friday, September 19, 2008
Call to MAS to take pro-active action
Two months ago, the New York State Attorney took action against several financial institutions for marketing the "auction rate securities" to retail investors on the representation that they are liquid investments and can be redeemed at any time. The financial institions had to buy back these securities at no loss to the investors.
I hope that the Monetary Authority of Singapore or the Attorney General can take similar action on behalf of retail investors who had been misled into investing in the Mini-Bonds and similar structured products by their bank's relationship managers in the belief that these investments are safe.
It is time to hold the financial institutions accountable for their mis-selling activities and for our regulators to be pro-active.
I hope that the Monetary Authority of Singapore or the Attorney General can take similar action on behalf of retail investors who had been misled into investing in the Mini-Bonds and similar structured products by their bank's relationship managers in the belief that these investments are safe.
It is time to hold the financial institutions accountable for their mis-selling activities and for our regulators to be pro-active.
Minibond Series 6
This blog was first posted on 16 July 2007
Dear Mr Tan
My risk-adverse retired father has always placed his funds in fixed deposits as they are risk-free.
I saw the advertisement in today's papers for the minibonds series 6 which pays 5.1% for 5 3/4 yrs.
These bonds seem to be relatively low risk and the returns appears good. Is there any catch? I'm considering asking my dad to transfer his funds to buy this since his fixed deposit is maturing. Can you advise?
-----------------------------
REPLY:
The Minibond series 6 pays 5.1% p.a. for 5 3/4 years. This payment comes from the principal invested in the fund, and is NOT the same as the actual return earned on the fund.
Here are the information obtained from the advertisement.
1. The fund is invested in credit-linked securities that are rated AA at the time of issue. These credit-linked securities have a high risk than bonds with the same rating.
2. The Notes are not principal guaranteed or principal protected. There is a likelihood that the investor may not get 100% of your principal on the maturity date. This is likely to happen, as the fund pays out more than what it earns and has to incur heavy expenses (not disclosed) for distributing and managing the fund.
3. If there is a Credit Event happening to any of the 6 financial institution before the maturity date, the investor may lose part or substantially all of the invested amount.
You need to read the prospectus carefully to understand the definition of the Credit Event and the likely amount that can be lost. (I believe that this is difficult to assess, even for an expert like me).
4. There is a provision for the Issuer to redeem the Notes earlier, on or after 3 years from the Issue Date. This right is likely to be exercised, if interest rate has fallen. The investor will have to re-invest the money to earn a lower interest rate.
5. You are advised to read the prospectus and understand the investment risks and the terms. If you do not, you cannot complain later if the investment turn out to be bad.
My views: Do not invest in this product, as it has much uncertainty and the return is not attractive. It is better to invest in a government bond to earn about 3.5% per annum over the next 5 years.
You can read the following:
Structured Products - how they work
Avoid Structured Products
Ask Mr Tan
Dear Mr Tan
My risk-adverse retired father has always placed his funds in fixed deposits as they are risk-free.
I saw the advertisement in today's papers for the minibonds series 6 which pays 5.1% for 5 3/4 yrs.
These bonds seem to be relatively low risk and the returns appears good. Is there any catch? I'm considering asking my dad to transfer his funds to buy this since his fixed deposit is maturing. Can you advise?
-----------------------------
REPLY:
The Minibond series 6 pays 5.1% p.a. for 5 3/4 years. This payment comes from the principal invested in the fund, and is NOT the same as the actual return earned on the fund.
Here are the information obtained from the advertisement.
1. The fund is invested in credit-linked securities that are rated AA at the time of issue. These credit-linked securities have a high risk than bonds with the same rating.
2. The Notes are not principal guaranteed or principal protected. There is a likelihood that the investor may not get 100% of your principal on the maturity date. This is likely to happen, as the fund pays out more than what it earns and has to incur heavy expenses (not disclosed) for distributing and managing the fund.
3. If there is a Credit Event happening to any of the 6 financial institution before the maturity date, the investor may lose part or substantially all of the invested amount.
You need to read the prospectus carefully to understand the definition of the Credit Event and the likely amount that can be lost. (I believe that this is difficult to assess, even for an expert like me).
4. There is a provision for the Issuer to redeem the Notes earlier, on or after 3 years from the Issue Date. This right is likely to be exercised, if interest rate has fallen. The investor will have to re-invest the money to earn a lower interest rate.
5. You are advised to read the prospectus and understand the investment risks and the terms. If you do not, you cannot complain later if the investment turn out to be bad.
My views: Do not invest in this product, as it has much uncertainty and the return is not attractive. It is better to invest in a government bond to earn about 3.5% per annum over the next 5 years.
You can read the following:
Structured Products - how they work
Avoid Structured Products
Ask Mr Tan
Pinnacle Notes and MiniBonds
This blog was first posted on 16 July 2007
COMMENT POSTED IN MY BLOG:
Maybe you like to comment on the Minibonds and Pinnacles. Both recieved overwhelming response from the public. What I know they are products designed for people who want streams of income. The tenor is 3-5 years with step up options with higher returns.
Since they are well received they must be good. Investors don't throw away $150 mil. for each tranche for nothing. There had been quite a few tranches already.
--------------------------------
REPLY:
Can you give specific examples of the earlier series of the Minibonds and Pinnacle Notes. What price are they trading now? How well have they performed? Did they provide a good return to the investors?
I have highlighted some of the current features of these products. They contain an element of speculation and carry a risk that has not been properly assessed.
COMMENT POSTED IN MY BLOG:
Maybe you like to comment on the Minibonds and Pinnacles. Both recieved overwhelming response from the public. What I know they are products designed for people who want streams of income. The tenor is 3-5 years with step up options with higher returns.
Since they are well received they must be good. Investors don't throw away $150 mil. for each tranche for nothing. There had been quite a few tranches already.
--------------------------------
REPLY:
Can you give specific examples of the earlier series of the Minibonds and Pinnacle Notes. What price are they trading now? How well have they performed? Did they provide a good return to the investors?
I have highlighted some of the current features of these products. They contain an element of speculation and carry a risk that has not been properly assessed.
Avoid complicated products
This blog was first posted on 17 July 2007
I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.
To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.
After spending this time, the investor will still have more questions. There are still so much uncertainty.
If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.
For example, they will tell you that the risk of a credit event is small, that your investment is safe.
Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.
What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".
I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.
Lesson: Do not invest in complicated products, that you cannot understand.
If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).
I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.
To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.
After spending this time, the investor will still have more questions. There are still so much uncertainty.
If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.
For example, they will tell you that the risk of a credit event is small, that your investment is safe.
Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.
What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".
I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.
Lesson: Do not invest in complicated products, that you cannot understand.
If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).
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