Credit freeze in Singapore

A few weeks ago, the Government took the bold step of guaranteeing all bank deposits in Singapore. This was to prevent the outflow of deposits to other countries that provided similar gaurantees. (Personally, I do not agree with this approach, as it continued to depress interest rate in Singapore).

Later, the Government provided some guarantee for banks to provide credits for business operations, subject to some due diligence. I remembered that the guarantee was for 50% of the lending.

I heard from a business friend that the guarantee had since been increased to 80 or 90 percent, but the banks are still reluctant to lend. (I have not verified this information). The unwillingness of banks to lend is causing some business failures - as they depend on credit to continue their operations.

In my view, it is a bad idea for business to depend on short term credit from banks for their operations. They should increase their capital or issue long term bonds that pay a higher rate of interest (say 4 to 7% p.a.). They can earn a higher return on their investment, so they can afford a higher and fairer payout to the bond holders.

To make these bonds attractive to long term investors, the guarantee can provide a guarantee on the principal and dividends and charge a guarantee fee to the issuer. This will allow the issuer to get a source of long term funding and do not have to worry about talking to the bank yearly.

This Government guarantee fee can be at a subsidised rate, to support the economy in its current phase. When the conomy stabilises, it can be done at the market rate, which depends on the risk. The Government can also set up a separate insurance company to provide the credit default insurance on commercial terms. 

Summary: Encourage businesses to issue long term bonds to get a secure source of funds for their long term operations. The Government can provide a guarantee on these bonds (subject to due diligence and a guarantee fee),  to help businesses to overcome the current economic turmoil. 

MAS acting on complaints

Dec 31, 2008

I REFER to last Wednesday's letter by Mr Leong Kok Ho, 'Why MAS should handle complaints'. The Monetary Authority of Singapore (MAS) understands the anxiety of many investors who have bought DBS High Notes 5, Lehman Minibond Notes and Merrill Lynch Jubilee Series 3 LinkEarner Notes. 

We assure investors that we are monitoring the financial institutions' complaints handling and resolution process. Our priority is to ensure that all complaints are handled seriously and impartially without the process becoming overly legalistic.

Independent parties have been appointed to review the resolution processes of the financial institutions concerned to ensure that these processes are independent, fair and transparent.

MAS has, in consultation with the independent parties, conducted on-site visits to assess the handling and review of complaints, including observing the internal review panels in action. We are working with the independent parties to ensure that each financial institution has a robust assessment framework to identify indicators of potential mis-selling and offer fair financial settlement where appropriate. The independent parties have provided feedback to MAS on how the financial institutions have applied the framework across a sample of actual cases. We are ensuring that the assessment framework is consistent across financial institutions.

Investors who are not satisfied with the outcome of the financial institution's review of their complaints may refer their complaints to the Financial Industry Dispute Resolution Centre (FIDReC) for resolution. FIDReC is an independent body set up to provide investors with an affordable and impartial avenue to pursue claims against their financial institution. The decision of the FIDReC adjudicator is final and binding on the financial institution, but not on the investor. If the investor is not happy with the decision made at FIDReC, he is free to reject the decision and pursue his claim through other avenues.

As part of MAS' formal investigations, we are looking at financial institution-wide issues, such as the financial institutions' due diligence on structured notes, the procedures used at the point of sale, and the training and supervision of relationship managers. MAS will take firm and appropriate regulatory actions where there are breaches of law or regulations by the financial institutions or their representatives. MAS is also working with the independent parties to ensure that any potential financial institution-wide issues identified in the course of investigations have been incorporated into the assessment of individual complaints.

Angelina Fernandez
Director (Communications)
Monetary Authority of Singapore
http://www.straitstimes.com/ST%2BForum/Story/STIStory_320293.html

Invest in the stock market

Dear Mr. Tan,

Should I invest in a capital guaranteed product that pays 2% for 2 years?

REPLY

If you have spare cash, you can invest in shares to earn the following:

a)  STI ETF can earn a dividend yield of around 5%. Even if the dividend drops, you can still earn 3% or more.

b)  REITs (real estate trust) can earn you a dividend yield of 10%.  Even if the rental drop, you can still earn 5% or more.

Do not worry about the share price (ETF or REIT). If it drops, you can still wait and collect the dividend of 3% or 5%. Wait for the stockmarket to recover in 2 or 3 years or longer, in a worse case. You can get a gain of 20% to 50%. Be prepared to take risk and get a better return.

Do not invest in capital guaranteed product that earns 2% and locks you for 2 years.

Tip: Avoid performance chasing based on short-term returns

In a book entitled "Common Sense Investing", the author Jack Bogle said, "In selecting mutual funds, most fund investors seem to rely .... on exciting performance over the short term. Studies showed that over 95% of all investor dollars flow to funds rated four or five stars by Morningstar, the statistical service most broadly used by investors in evaluating fund returns".

These star ratings are based on a composite of a fund's record over the previous 3-, 5- and 10-year periods. It has a heavy bias in favor of recent short-term returns.

A study showed that a mutual fund portfolio continuously adjusted to hold only Morningstar's five-star funds earned an annual return of 6.9 percent between 1994 and 2004, nearly 40% below the 11.0 percent return on the Total Stock Market Index.

Jack Bogle selected the top 10 performers among the 851 equity funds during the "new economy market bubble of 1997 to 1999. These funds performed badly during the bursting of the bubble in 2000 to 2002. For the six year period, these funds earned a cumulate return of 13% for the full six-year period, compared to the cumulative return of 30 percent for the S&P 500.

For the shareholders of these funds, it was a disaster. While the funds achieved a net gain of 13 percent, the shareholders incurred a loss of 57 percent. Most shareholders invested in these funds when they were close to the peak and suffered the full effect of the downfall.

Jack Bogle's message is: avoid performance chasing based on short-term returns, especially during great bull markets.

Results - Mis-selling of credit linked notes

Based on 58 replies

2. Which notes did you invest in?
Minibond       29
High note      12
Pinnacle note  11
Jubilee note   3
Other note     3

3. Which distributors did you buy the notes from?
Hong Leong     23
DBS            13
Maybank        9
OCBC           3
Philip Sec     2
ABN Amro       1
Other          7

4. How much did you invest?
Less than $25,000     10
$25,000 to $50,000    18
$50,001 to $100,000   16
$100,001 to $200,000  11
More than $200,000    3

5. Have you lodged a complaint with the distributor?
Yes                  55
No                   3

6. Have they made you an offer for compensation?
No offer yet           35
Rejected my complaint  20
Offer 0 to 30%          0
Offer 31 to 50%         1
Offer more than 50%     1

7. How long did they take to make their decision, from the time that you lodged the complaint?
Less then 4 weeks      8
4 to 8 weeks           17
More than 8 weeks      21

8. Was the distributor fair in attending to your complaint?
Yes      15
No       30

Survey - Mis-selling of Credit Linked Notes

This is a new survey, to collect statistical information by product and distributor. Please participate:

http://www.surveymonkey.com/s.aspx?sm=bH_2feqjLGwIcvaYbpcbXdRA_3d_3d

MAS reply on Pinnacle Notes

Hi Kin Lian,

Now a piece of positive news. MAS has finally responded to the PLEA I had sent last month on behalf of some 80 PN holders in November. I will like to share this with you and the other PN holders, hopefully before the year is out. 

I will therefore like to impose once again on your kindness to post MAS's letter (attached below) on your website for their awareness.

Dear Mr Quek

We refer to your letter dated 19 November 2008 to Mr Heng Swee Keat, Managing Director, MAS.

2. On 18 December 2008, Morgan Stanley Asia (Singapore) Pte, the arranger of Pinnacle notes published a number of Frequently Asked Questions (FAQs) that address the issues you raised, among others. The FAQs are available athttp://www.morganstanley.com/pinnaclenotes/pdf/series9-10/FAQs_18-12-08.pdf

3. You enquired about the root causes for the devaluation of Pinnacle credit linked notes. Please refer to questions 5 and 11 of the FAQs which explain the reasons for the fall in value of the Notes. You also raised the question on whether any steps could be taken to protect the value of the Pinnacle notes. The petition alluded to steps being taken for the Lehman minibond notes and that these steps if viable should similarly be extended to Pinnacle notes. Please refer to Questions 8 and 9 of the above FAQs where the differences in the circumstances giving rise to early redemption of Minibond notes and the Pinnacle notes are explained, and on the restructuring of Pinnacle notes. You may also refer to MAS' press release of 2 Dec 2008 where we informed investors that due to legal complexities that have arisen, the trustees and receivers are of the view that restructuring of the Minibond notes is not currently viable.
Link to MAS press release on 2 Dec 2008:

http://www.mas.gov.sg/news_room/press_releases/2008/Update_on_Lehman_Minibond_Notes_Programme.html

4. For consumers who consider that the Pinnacle notes were mis-sold to them, we would advise them to first lodge their complaint directly with the financial institution (FI) that sold them the products. MAS requires FIs to have a rigorous process to look into every complaint of mis-selling and resolve them fairly. In the event that consumers are not satisfied with the FI’s reply, they may consider approaching the Financial Industry Disputes Resolution Centre (FIDReC). FIDReC is an independent institution which aims to provide consumers with a one-stop avenue for resolving disputes in the banking, insurance and capital market sectors. Separately, where we have clear evidence that a FI has breached our laws or regulations, we will hold the FI to account.

5. If you have any queries, please feel free to contact me.

Christina Tan
Consumer Issues Division
Monetary Authority of Singapore