HONG KONG: Investigations of financial institutions that sold Lehman Brothers minibonds became more difficult after some complainants in the case reached separate settlements, Hong Kong Monetary Authority chief executive Joseph Yam said yesterday.
Yam made the revelation Friday as he was grilled by legislators in the Legislative Council subcommittee hearing on the Lehman Brothers products disaster.
"We can still get the information we need from banks," he said. "However, we cannot make verification with the investors (under terms of settlement agreements, investors are prohibited from disclosing information about their individual cases). That makes our investigation difficult."
Yam's revelation immediately drew criticism from subcommittee members. James To accused the authority of protecting the banks.
"How can you let this happen to hinder your investigation?" he demanded.
Yam defended the authority, countering that it could not stop investors from settling their complaints with the banks that sold the instruments.
"If we imposed restrictions on banks because of the difficulty involved in the investigations, the investors may not be able to reach settlements and get back their money. That is not fair to them," he said.
Yam, who will retire in October, has been grilled by the subcommittee on six occasions. Friday's hearing saw repetition of earlier incidents, with Yam's testimony interrupted by shouts from angry investors in the public gallery. Subcommittee chairman Raymond Ho Chung-tai was forced to call five-minute adjournments on two occasions so that the furor from the gallery could be quieted.
Financial services sector legislator Chim Pui-chung and Hong Kong Island constituency legislator Regina Ip said the authority failed to prevent banks from employing hard-sell tactics to persuade investors to buy Lehman Brothers financial products.
"One of the investors purchased the product through her daughter working in the banks. The daughter has not gone through any training. The bank hires her, and she is just trying hard to sell the products to her relatives as well. It is a problem for banks to set a selling quota for the staff to achieve," she said.
Yam reiterated that the authority does not tolerate irregular sales practices and will deal with the matter seriously.
"If the investors, under the cold call practice, are not interested in the product, and the investors purchased the products simply because the banks or agents called them saying they have money in their accounts, this will not be tolerated," he said.
He said the authority asked about 50 banks to conduct self-assessments in 2008.
He added that the authority would be more thorough when assessing banks in the future.
The authority deputy chief executive Choi Yiu-kwan will give evidence at a hearing of the subcommittee in June. But chairman Ho said legislators intend to recall Yam to give further evidence after Choi's testimony.
Saturday, May 23, 2009
SCMP:Yam denies shielding banks from scrutiny
The Monetary Authority cannot stop banks that settle with minibond investors inserting clauses requiring that they drop their complaints and cease disclosing information about their case, its chief executive told lawmakers yesterday.
Joseph Yam Chi-kwong denied he was shielding banks from scrutiny.
He was testifying for the sixth time to the Legislative Council panel inquiring into the alleged mis-selling by banks of credit-linked derivatives, including minibonds, issued or guaranteed by Lehman Brothers. At the end of last year, three months after the American bank filed for bankruptcy - causing 48,000 Hong Kong investors to lose much or all of the HK$20 billion they put into such products - 17 banks paid HK$257 million to settle 616 investors' claims.
"My view is that the HKMA doesn't have any power to interfere with the relationship between the banks and their clients, even if an investor has promised the bank to withdraw their complaint or to not make available further information," Mr Yam told the subcommittee.
"We can still get hold of the information we require from the banks. Of course, if we cannot get information from the investors to corroborate, then it would be more difficult to proceed with the investigation."
He said he would seek legal advice as to whether the inclusion of such conditions in settlements with investors was against the public interest.
A spokesman for the authority said the outcome of such settlements would not affect its investigations.
The authority has received nearly 21,000 complaints about banks' sale of minibonds. Despite their name, minibonds are complex products that derive part of their value from underlying credit instruments.
An authority circular issued in March said banks should not include in settlement agreements clauses that stopped investors disclosing relevant information to regulators.
Democratic Party lawmaker James To Kun-sun called on Mr Yam to reconsider allowing banks to impose such conditions, since they might interfere with the authority's statutory duty to regulate banks. Mr Yam said he would reconsider, but insisted that restricting banks would be unfair if it affected minibond investors' ability to reach a settlement.
Questioned by lawmakers yesterday, Mr Yam sought to show that the authority was on top of the situation. Inspections of bank activities continued between 2003 and 2007 even though there were not many cases of suspected mis-selling of such derivatives, he said. Around the middle of last year, the authority identified more cases of suspected mis-selling. In February last year, the authority set out to investigate 11 banks selling high-risk derivatives, but launched investigations into only four.
Yesterday's Legco session was interrupted three times by rowdy spectators in the public gallery calling for Mr Yam to step down. He will retire on October 1 after 16 years in the job.
Joseph Yam Chi-kwong denied he was shielding banks from scrutiny.
He was testifying for the sixth time to the Legislative Council panel inquiring into the alleged mis-selling by banks of credit-linked derivatives, including minibonds, issued or guaranteed by Lehman Brothers. At the end of last year, three months after the American bank filed for bankruptcy - causing 48,000 Hong Kong investors to lose much or all of the HK$20 billion they put into such products - 17 banks paid HK$257 million to settle 616 investors' claims.
"My view is that the HKMA doesn't have any power to interfere with the relationship between the banks and their clients, even if an investor has promised the bank to withdraw their complaint or to not make available further information," Mr Yam told the subcommittee.
"We can still get hold of the information we require from the banks. Of course, if we cannot get information from the investors to corroborate, then it would be more difficult to proceed with the investigation."
He said he would seek legal advice as to whether the inclusion of such conditions in settlements with investors was against the public interest.
A spokesman for the authority said the outcome of such settlements would not affect its investigations.
The authority has received nearly 21,000 complaints about banks' sale of minibonds. Despite their name, minibonds are complex products that derive part of their value from underlying credit instruments.
An authority circular issued in March said banks should not include in settlement agreements clauses that stopped investors disclosing relevant information to regulators.
Democratic Party lawmaker James To Kun-sun called on Mr Yam to reconsider allowing banks to impose such conditions, since they might interfere with the authority's statutory duty to regulate banks. Mr Yam said he would reconsider, but insisted that restricting banks would be unfair if it affected minibond investors' ability to reach a settlement.
Questioned by lawmakers yesterday, Mr Yam sought to show that the authority was on top of the situation. Inspections of bank activities continued between 2003 and 2007 even though there were not many cases of suspected mis-selling of such derivatives, he said. Around the middle of last year, the authority identified more cases of suspected mis-selling. In February last year, the authority set out to investigate 11 banks selling high-risk derivatives, but launched investigations into only four.
Yesterday's Legco session was interrupted three times by rowdy spectators in the public gallery calling for Mr Yam to step down. He will retire on October 1 after 16 years in the job.
Saturday, May 16, 2009
Pledge by public servants
I visited the Parliament building of the provincial government of British Columbia. There was a display showing the pledge taken by the public servants. Some key elements of the pledge are:
1. To serve the people of British Columbia
2. To loyally obey the Government who are the elected representatives of the people
3. To serve the public interest over personal interest and avoid conflict of interest
4. To uphold confidentiality
This pledge recognises that it is the people who are supreme, and that the current Government is there only as the elected representatives of the people, and that the Government can be changed, if the people so desires.
It is quite refreshing to know that this is what democracy and legitimacy of Government really is.
Survey - social benefits and taxation
Do you prefer the state (i.e. Government) to provide less social benefits and reduce taxes, or to provide more social benefits (to be funded by higher taxes). Give your views in this survey.
Here are the survey results.
Running a business on sound principles
Lessons to be learned about operating a business on sound principles. Read this article.
SCMP:Authority suspected banks of mis-selling
The Monetary Authority suspected three banks of mis-selling credit-linked products before Lehman Brothers collapsed but did not check more banks or alert the public to its findings, its chief executive, Joseph Yam Chi-kwong, told a legislative inquiry yesterday.
There was "not sufficient information to show it was an industry-wide problem", he said.
Credit-linked derivatives, most of them minibonds issued or guaranteed by Lehman, lost much or all of their value after it collapsed last year amid the global financial crisis. Some 48,000 Hongkongers had invested HK$20 billion in such products.
Mr Yam said the authority set out to investigate 11 banks selling such products - including Lehman-linked ones - in February last year because of their high risks. But only four banks were investigated and that process was disrupted when Lehman Brothers collapsed.
Of the four, three were suspected of mis-selling, Mr Yam said. One has since been found guilty of misconduct in connection with the sale of credit-linked products; the other two are still under investigation.
Mr Yam said the inquiry last year identified problems with the way these banks' frontline staff explained to clients the nature of the products and their main risks, staff understanding of the products and staff management systems; and found sales documents were faulty and did not give detailed risk assessments for the products.
Lawmakers criticised the authority for not widening the investigation or alerting the public in time.
"There were about 20 banks selling Lehman products. Why did you not investigate all other banks immediately when you found three out of four problematic?" Ronny Tong Ka-wah of the Civic Party asked.
Independent Regina Ip Lau Suk-yee said: "What you identified in the probe were critical problems. If you had called a halt to such malpractice across the industry in time, and informed the public about that, you'd have saved many people."
Mr Yam said the authority did not have enough information at the time to show there was industry-wide malpractice. He also said the authority was investigating four complaints from bank staff about "oppressive" managements who based incentives solely on sales volume, regardless of any malpractice.
The authority considered having investigators pose as customers to check banks' sales practices, but did not do so since the Securities and Futures Commission did not use the practice and "we have to conform with their standards", Mr Yam said.
There was "not sufficient information to show it was an industry-wide problem", he said.
Credit-linked derivatives, most of them minibonds issued or guaranteed by Lehman, lost much or all of their value after it collapsed last year amid the global financial crisis. Some 48,000 Hongkongers had invested HK$20 billion in such products.
Mr Yam said the authority set out to investigate 11 banks selling such products - including Lehman-linked ones - in February last year because of their high risks. But only four banks were investigated and that process was disrupted when Lehman Brothers collapsed.
Of the four, three were suspected of mis-selling, Mr Yam said. One has since been found guilty of misconduct in connection with the sale of credit-linked products; the other two are still under investigation.
Mr Yam said the inquiry last year identified problems with the way these banks' frontline staff explained to clients the nature of the products and their main risks, staff understanding of the products and staff management systems; and found sales documents were faulty and did not give detailed risk assessments for the products.
Lawmakers criticised the authority for not widening the investigation or alerting the public in time.
"There were about 20 banks selling Lehman products. Why did you not investigate all other banks immediately when you found three out of four problematic?" Ronny Tong Ka-wah of the Civic Party asked.
Independent Regina Ip Lau Suk-yee said: "What you identified in the probe were critical problems. If you had called a halt to such malpractice across the industry in time, and informed the public about that, you'd have saved many people."
Mr Yam said the authority did not have enough information at the time to show there was industry-wide malpractice. He also said the authority was investigating four complaints from bank staff about "oppressive" managements who based incentives solely on sales volume, regardless of any malpractice.
The authority considered having investigators pose as customers to check banks' sales practices, but did not do so since the Securities and Futures Commission did not use the practice and "we have to conform with their standards", Mr Yam said.
Friday, May 15, 2009
Second Lehman-backed catastrophe bond defaults
LONDON (Reuters) - A second Lehman Brothers-backed catastrophe bond is in default after issuer Ajax Re Ltd failed to repay principal in full at maturity, according to credit rating agencies.
The $100 million bond, issued in April 2007 to give Bermuda-based Aspen Insurance Holdings Ltd cover against losses from earthquakes in California, had been expected to default following the collapse of Lehman, its effective guarantor.
Credit rating agency Standard & Poor's said in a May 11 statement that it had lowered its rating on the bond to D, signifying default, and withdrawn the rating.
It said Ajax Re had paid all the interest due on the bond, "but the ultimate payment of principal was not made in full on May 8, 2008 due to a shortfall in the realizable value of the collateral assets under the TRS (total return swap)."
S&P had said a default was likely despite a timely payment of interest on March 16.
The deal is among four catastrophe bonds that used a unit of Lehman Brothers as TRS counterparty, contracted to ensure the collateral backing the bonds was sufficient to meet interest and principal repayments, and to make up any shortfall.
When the U.S. investment bank filed for bankruptcy on September 15, investors were left with direct exposure to market losses on the collateral assets, and the bonds were downgraded.
Another of the bonds, issued by Willow Re with Allstate Corp as ceding insurer, was already in default after Willow failed to make in full a February 2 interest payment.
Another rating agency, insurance specialist A.M. Best, also said it had downgraded the Ajax Re notes to "d" following the failure to fully repay the principal at redemption.
Insurers have used catastrophe bonds since the 1990s to manage their exposure to natural disasters such as hurricanes and earthquakes by transferring potential losses to investment funds. Investors receive a high rate of interest but risk losing part or all of their principal if a catastrophe occurs.
(Reporting by Catherine Evans; Editing by Simon Jessop)
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