The Minibonds / High Notes Fiasco: Who Should Bear the Blame???

As we all know, the subprime fiasco which originated in the United States has seen its hand of carnage stretch beyond the boundaries of physical geography and slap several hundred Singaporean "investors" in the face to the tune of millions of dollars in losses. And of course now that the financial weapons of mass destruction have detonated, the casualties of this “economic pearl harbour” are scrambling to apportion the blame to other parties, in hopes that they can get some sort of money back. Meanwhile, those involved in the long chain of origination and distribution of the toxic financial instruments are of course making sure that none of the blame falls on them, and the way to do that, is to blame someone else, of course.

In the midst of this clown show, which are the parties involved and what blame can you place on them, in order to avoid taking personal responsibility? Here’s my take on this comedy of errors:

Lenders

Several US lenders made questionable loans during the period of a housing bubble to borrowers of questionable credit-worthiness. Many of them did this in an attempt to "flip" the loans off their balance sheets using credit derivatives and other instruments, and in the process earn fees. While this method of churning loans made money while the credit markets remained buoyant and while the housing market stayed in the clouds, it soon turned sour once the housing market turned on its head and the credit markets imploded, leaving the lenders stranded with bad loans on their balance sheets.

VERDICT: Greedy lenders have to take the blame for lending irresponsibly. Several have suffered the ultimate penalty by going bankrupt

Mortgagees

And of course there are a whole bunch of mortgagees who took out loans they could not afford in order to buy property that was over valued and which should never have been bought. The heady prospect of flipping a piece of property for several thousand dollars in profit drove many speculators to launch the housing market into an unsustainable bubble, which ultimately burst, leaving the borrowers deep in debt with real estate which could only be sold at a steep loss.

VERDICT: Irresponsible borrowers took out loans they could not repay in order to speculate on the property market. These mortgagees over-leveraged and paid the penalty by losing out big time on their investments.

Congress

Right now, politicians are trying to say all the right things to convince the people that the financial crisis is all the fault of those greedy irresponsible bankers. But of course they forget that Fannie Mae and Freddie Mac were actually commissioned by congress itself, and of course they won’t tell you that while Fannie Mae officials were trying to tighten lending standards, it was Congressmen who were berating them for “impeding the American dream.”

VERDICT: Idiotic politicians who did not understand finance encouraged irresponsible lending, in the name of allowing every American to own their own home - lovely rhetoric, but financially very dumb.

Investment banks

These guys are the ones we all love to hate. The man on Main Street loves to point the finger at the Wall Street banker who is drawing a multi-million dollar salary. And now that several Wall Street institutions have crashed and burned, plumber joe is rubbing his hands with glee.

And yes, many of these Wall Street dudes were irresponsible in their actions. Their creativity and ingenuity drove the credit market to new heights, setting it up for the most spectacular crash this century. They hived toxic investments off to unsuspecting investors. They created complex, labyrinthine financial instruments which people could not understand in order to transfer risk to unsuspecting parties.

VERDICT: Greedy bankers created and sold some of the most complex, toxic financial instruments the world has yet to see, all in the name of greater fees and bigger bonuses! And now, several of the banks have been wiped off the face of the earth, into the realm of history.

Local banks and brokerages

And where did the instruments originated by the investment banks go? In order to reach the Ang Mo Kio investor, it had to be distributed through the local financial institutions. These local institutions, of course, attracted by the commissions they would earn when they sold the products to investors, pushed their burden of responsibility to regulators to give the okay to investors.

Of course they didn’t understand the real import of what they were doing, but who cares about that when there’s money to be earned?

VERDICT: Greedy bankers and brokers closed their eyes and gleefully collected commissions in the process of distributing the products to their clients. If Daddy MAS says the products are okay, then they are okay. Yippeeee!!!!

Relationship managers

Ha ha ha. No surprise why these guys have been called relationship damagers. They coaxed, cajoled, manipulated and deceived their clients into buying products which should never have been touched by the man on the street. And now, this breed is one of the most reviled in Singapore society.

VERDICT: Unethical relationship managers sold the financial products without really understanding them. And now many of them are facing the axe, in addition to the ire of angry investors

Regulators

Regulators, of course, truly had no idea what the substance of those credit instruments really were. For goodness sake, it takes Mathematics PhDs to really understand the ins and outs of those instruments. Did MAS hire these guys to thoroughly analyse the products before approving them? I seriously doubt so.

VERDICT: The regulators didn’t really have the expertise to understand the instruments they had approved. They should instead have left it off the approved investment list

Investors

You didn’t seriously think I would leave the investors who actually purchased these derivative instruments blame-free, did you? Ha ha. Guess What? Caveat Emptor. Most of these investors didn’t take the effort to really understand what they were getting themselves into. Many didn’t bother to read the investment prospectus, and even if they did, never really took the time and effort to realize that they should not be anywhere the minibonds, high notes and other similar instruments. More on this? Read here.

The Perfect Chain

As you can see, it takes a "perfect chain" of irresponsible acts to result in the financial Chernobyl that has come to pass. All it took was one responsible individual to break the sequence of events. But strangely, all those involved behaved more or less in the same way.

If you are any one of the abovementioned parties, I have now given you ammunition to blame everybody else except yourself.

I hope you all have lots of fun playing the big blame game!!! =)

Why Regulation for Minibonds...?

In one of the latest developments in Singapore's Minibond saga, Tan Kin Lian, champion of the burnt minibonds investors, has released a request for proposals to lawyers for services for collective legal action by the minibonds investors against the bankers and brokers who sold them the minibonds products.

Also, the 84-page minibonds prospectus is available on the TOC website, here. A brief browse into the contents of the prospectus reveals some interesting information. On page 17, under "Risk Factors," we see:

Risks relating to the nature of the Notes

Suitability of the Notes

The purchase of the Notes involves certain risks including market risk, credit risk and liquidity risk. Investors should ensure that they understand the nature of all these risks before making a decision to invest in the Notes. In addition, on the occurrence of a Credit Event (as defined herein) in respect of a Reference Entity, Noteholders could lose all or a substantial part of their investment in the Notes. This Base Prospectus and the Pricing Statement are not and do not purport to be investment advice. You should conduct such independent investigation and analysis regarding the Notes and the other assets on which the obligations of the Issuer under the Notes are secured as you deem appropriate. You should make an investment only after you have determined that such investment is suitable for your financial investment objectives. You should consider carefully whether the Notes are suitable for you in light of your experience, objectives, financial position and other relevant circumstances.

From the outset, the prospectus explicitly states several important points for that investors should do and take note of:

Noteholders could lose all or a substantial part of their investment in the Notes.

It also clearly states,

You should conduct such independent investigation and analysis regarding the Notes and the other assets

In one paragraph alone, the prospectus clearly instructs the investor in what are sound principles of investment analysis. Always do your own homework (independent investigation and analysis).

Ultimately, then, the investors who bought the minibonds cannot fault Lehman brothers with the argument that they depended on the RMs to advise them, as Lehman had clearly stated in the prospectus that the investors need to do their own independent analysis.

So the problem, then, are the RMs & brokers guilty of anything? The investors claim they were deceived and misplaced their trust in the advisors who sold them things they should not have been investing in.

That, my friends, is why regulation is needed - NOT because of some supposed higher cause of justice, but instead to prevent idiots from destroying their retirement accounts with their own stupidity, and also to prevent un-ethical misrepresentation of securities by financial 'advisors'

The government also can't really be faulted... because the RMs had a duty to inform the 'investors' that they had to do their own homework. This was not the government's responsibility.

Hence, the best way to protect yourself is to just automatically adopt the attitude that one must do his own homework. And if you find that you do not understand what you are analysing, just stay away. Abdicating the responsibility of investment analysis to someone else is a sure recipe for disaster. If the 'investors' (aka fools) had actually bothered to adopt this principle, they would not have been misled by the RMs.

Don't be a fool. Don't let ignorance destroy your retirement account. The best way to protect yourself from fraud is to do your own homework!!!

SingTel's OpenNet Wins NGNBN NetCo Bid; Biggest Loser to be StarHub

OpenNet recently won the NetCo segment of the NGNBN. The consortium comprised Canada's Axia NetMedia, and Singapore's SingTel, SPH and Singpower Group. Although it might have been painted as a close "two-horse" race, I doubt if there were ever any questions as to who was going to win the bid. With the government putting up $750m to fund the NGNBN NetCo passive network, it could not afford to place its bets on the Infinity network, which would have faced stiff, cutthroat competition from SingTel, had the latter not won the tender.

And now that SingTel's consortium has won the bid, the long term outlook for StarHub doesn't look pretty. StarHub's franchise lies with its cable network and its strong programming line-up. It keeps customers and prevents churn by using its exclusive cable infrastructure to tighten its stranglehold on the telecoms market with strong triple & quadruple play packages.

But with the advent of the new NGNBN structure, StarHub will see this competitive advantage starting to erode. The open-access fibre infrastructure gives SingTel the advantage now. Despite holding only a 30% stake in OpenNet, SingTel has a huge revenue-share stake in OpenNet's revenues, due to its lease structure agreement with the newly-formed infrastructure company.

Furthermore, we can expect SingTel to move swiftly to rollout the new infrastructure and to start selling next-gen services in this market. The competition will force StarHub to lower prices on its cable franchise in order to prevent churn to the new SingTel fibre offerings. But that will be difficult, considering SingTel's assault on Starhub's cable network, most recently exemplified by MioTV's win of the Champions league broadcast rights.

Add to that SingTel's stranglehold and dominance over international internet gateways coming into Singapore (just try accessing youtube at peak hours over starhub and singtel, and you'll see the difference), and StarHub's cable internet is likely to suffer in the long run.

With the prospect of pricing pressure and heightened competition, Starhub doesn't look like the best stock in Singapore's telecom landscape. Furthermore, the company is almost exclusively focused in the Singapore market, unlike SingTel which has diversified investments in emerging markets overseas. Starhub will have to move quickly to reinvent itself in the light of latest developments, or it may continue to see its stock decline.

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[IDA] Selects OpenNet Consortium as its Network Company

By Anshu Shrivastava
TMCnet Contributing Editor

Axia NetMedia has announced that Infocomm Development Authority of Singapore (IDA) has selected the OpenNet consortium as its Network Company (NetCo).

As per the contract, OpenNet will provide passive fibre grid services for Singapore's Next Generation National Broadband Network (NGNBN).

Back in May, the company announced it entered into an agreement creating the OpenNet consortium. This OpenNet proposal is for the rights to provide passive fibre grid services throughout Singapore. The second is for the rights to provide the active Real Broadband services over the fibre grid.

At present, Axia has a 30 percent interest in OpenNet, while SingTel, Singapore Press, and SP Telecommunications taking up the remaining interest with 30 percent, 25 percent and 15 percent share, respectively.

“OpenNet's approach is future-proof with no compromises from either the technology or business structure perspectives for the passive segment of the network,” said Art Price, chairman and CEO at Axia NetMedia.

He also said in a statement that Axia now has references for the best in class next generation network (NGN) solutions for rural, regional and metropolitan communities. Based on open access no conflict principles, OpenNet plans to create the NGN solution.

According to the company, a key component of the solution involves OpenNet acquiring access to existing infrastructure through usage fees that vary with the market adoption of OpenNet's services.

OpenNet expects to complete the agreement contracting process with the IDA as planned, within the next seven months and expects that the Singapore-wide fibre grid will be completed by June 2012.

The company believes that when completed, OpenNet will provide Singapore with a “truly open, better and faster fibre-to-the-home network.”

This announcement is the first part of IDA's RFP process for a complete NGNBN. IDA said that the second part is the provision of active broadband services over the fibre grid.

Ken Lewis is Confused - BoA's Investment Banking to Remain Second Rate, even with Merrill Acquisition

“Merrill was paying typical Wall Street pay... We intend to pay market instead.” - Ken Lewis

Ken Lewis, CEO of Bank of America, has gone on the record making the statement above. And while this statement may seem to make sense to some, it really betrays Ken's confusion and fundamental lack of understanding about Wall Street and the investment banking business.

Mr Lewis seems to imply that there is a difference between "typical Wall Street pay" and "market pay." But While Merrill Lynch gives generous pay packets to its bankers and other staff, this WAS market pay - for the investment banking business. That's why it was typical. Typical Wall Street Market Pay!

But you see, Ken Lewis really didn't mean to say he intended to "pay market," because "paying market" means paying "typical Wall Street pay." What Ken Lewis really meant was this - We intend to pay "commercial bank pay". After all, that's what BoA has been, is, and will continue to be, predominantly - a huge lumbering commercial bank, and a second rate investment bank. Acquiring Merrill isn't going to change that, and here's why:

Paying investment bankers commercial banking pay, is simply going to see the investment bankers either:

1. leave for other bulge bracket banks which are going to continue paying wall street market pay, or


2. see them leaving to start their own corporate finance advisory houses and/or join other boutique investment banking shops, or


3. leave to start their hedge funds and/or private equity shops

Indeed, that's why we see what's going on today: top Merrill talent is already being snapped up by its competitors. Banks like Barclays, Goldman Sachs and Morgan Stanley are swooping in like vultures to scoop up the talent that has been wounded by Ken Lewis' foolish rhetoric. I mean, what would you expect the investment bankers to do when their egos are hurt by Ken Lewis' statements saying that he hates Wall Street's inflated pay?

That's why Lewis' cost cutting strategies with Countrywide and FleetBoston are going to fail miserably when he applies the same to Merrill. Merrill is NOT a commercial bank where the bargaining power lies with the bank and cost-cutting is the way to go. Merrill is primarily a relationship business where its most important assets are its people. And as Lewis will learn in time to come, your business goes out the door when your most important assets go out the door. And your assets go out the door when your bankers and brokers go out the door.

Commercial banking is fundamentally different to investment banking, and Ken Lewis doesn't get that. That's why BoA is going to continue to have a second rate investment banking franchise. And that's why, in the years to come, we're going to see write-downs on Lewis' ill considered and ill executed acquisition.

Good luck all you BoA shareholders. You're going to need it =)

Vikram Pandit is a Loser; Berkshire Hathaway 2 - GIC 0

In the latest development of what must be the most eventful year in the history of banking, Warren Buffett's Wells Fargo has snatched Wachovia bank from Vikram Pandit's Citigroup. In what must be the most humiliating and daring bank acquisition to date, Wells bid and closed a $16b deal for Wachovia, an offer that trumped Citi's pathetic $2.1b and that has Pandit and his minions crying foul, or whining, rather.

But Pandit seriously doesn't have much of a chance. Wells Fargo is paying much more and is not requiring any assistance from FDIC, in contrast to Citigroup's relatively pathetic bid which involved "FDIC agreeing to absorb up to $42 billion in losses should Wachovia's $312 billion pool of loans later turn sour." The withdrawal of FDIC involvement will surely mean a goodbye to Citi's bid for Wachovia, but Pandit must have known better than to expect that his paltry offer would have been the best in the market.

No sympathy from me for Lehman Minibonds investors

After the collapse of Lehman Brothers, Bear Stearns, and the unwinding of the credit markets over the past year or so, several Singaporean investors have found themselves burnt, having dumped significant portions of their retirement savings in credit derivatives and other similar financial instruments. One of these products in particular, Lehman's Minibonds, has been completely wiped out following the Chapter 11 bankruptcy of Lehman brothers.

Now, several of these investors (losers), are crying and complaining to the MAS, claiming that the authority did not do enough to protect them from the risks of these investments that are now close to worthless. As quoted in the Straits Times...

ST Sep 24, 2008
Minibonds worry: 'How is the layman supposed to beware when the prospectus is filled with jargon that even the sellers do not fully comprehend?'

MY WIFE and I are joint account holders of Maybank Singapore. We purchased $100,000 of the Minibonds Series 5 from Maybank's investment banker around August last year. We were under the impression then that these were supposedly very safe bonds.

Every few months, I would even call up Maybank to ask about the performance of our Minibonds and whether I should still hold on to them. Each time, I was informed that these bonds were still sound, and there wasn't any need to bail out.

Now that Lehman Brothers is bankrupt, and the public disclosure that our Minibonds investment has, in fact, nothing at all to do with bonds, but are instead Collateralised Debt Obligation (CDO)-related derivatives, we are extremely disappointed, distressed and upset with Maybank's lack of professionalism and poor product knowledge.

The investment advisers are more interested in closing the deal and going through the motions during the investors' risk-analysis.

We fully understand the concept of buyer beware. However, in this situation, how is the layman supposed to beware of what they're being sold when the 60-odd-page prospectus is filled with legalese and technical jargon that even the sellers themselves do not fully comprehend?

Ngo Chee Keong

Nice try mr Ngo, but I think people like you are idiots.

If you don't understand the legalese and technical jargon in the prospectus, WHY THE HELL ARE YOU TOUCHING THE INVESTMENT?

And, if you know that the sellers themselves do not fully comprehend the jargon, WHY ARE YOU STILL BELIEVING WHAT THEY SAY?

Anybody with any knowledge about investing will have heard one of Warren Buffett's principles of investing: Only invest within your circle of competence.

DON'T TOUCH WHAT YOU DO NOT UNDERSTAND

Obviously mr Ngo did not heed Warren Buffett's advice, just like thousands of other 'investors' who got burned by Lehman's bankruptcy.

And now he looks like the idiot he really is.

The minibonds saga should be a poignant lesson to everyone on why you should NEVER TRUST 'FINANCIAL ADVISORS'. Always DO YOUR OWN HOMEWORK. And DON'T TOUCH WHAT YOU DO NOT UNDERSTAND.

Those who diligently do their homework, educate themselves on financial instruments and how to invest well don’t get FOOLED by these so-called ‘financial advisors’

Any tom dick or harry can get a CFP or become a personal banker. just talk to insiders and they will tell you how selfish, mercenary and unethical these financial salespeople are. All they care about is getting their commission.

They DON’T GIVE A SHIT ABOUT THE WELFARE OF THE PEOPLE THEY ARE SELLING TO.

The best and only real protection for your retirement savings is to arm yourself with knowledge and financial education.

The best investors have never depended on the regulator to protect their downside.

These are universal principles of investing that will stand the test of time. Whether it was the go-go- years, the tech bubble, or today's credit crunch. Follow them and you will avoid the hazardous damages to your retirement nest.

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update:

The former CEO of NTUC, Tan Kin Lian, has now called on the MAS to be pro-active, and to 'protect' the small investors' interests:

"I hope that the Monetary Authority of Singapore or the Attorney General can take similar action on behalf of retail investors in Singapore, who had been misled into investing in the Mini-Bonds and similar structured products. These investors were clearly misled by the relationship managers into investing in these products on the advice that these investments were safe.

It is time to hold the financial institutions accountable for their mis-selling activities and for our regulators to be pro-active."

Indeed, how easy it is to point the finger at the bank, the broker, and the fund manager for misleading you. It is easy to point the finger at the regulator.

But, it looks like somebody agrees with me. here's a letter countering Tan Kin Lian's statements in the st forum:

ST Forum - Sep 25, 2008

Ultimately, it's buyer beware

I REFER to Tuesday's report, 'MAS tells banks to give priority to worried investors'.

It may be presumptuous of Mr Tan Kin Lian to assume that the banks erred in selling structured products to retail customers. These products are regulated under the Financial Advisers Act and the Securities and Futures Act. Only qualified advisers can market and give advice on such products. They must have a reasonable basis for any recommendation that is made on structured products and must provide investors with a fair description of all material information.

Be that as it may, investors looking to invest in these complex structures should exercise extra caution before entering into such financial transactions. The decision to invest should be based on your own judgment and not solely on advice given by the bank or its advisers. Before investing, you should consider whether the products fit with your financial goals, risk appetite and personal situation.

Understand the features of structured notes. Even in the case of a 'principal protected' product, the principal may only be insured by the issuer and, thus, may be lost in the case of a liquidity crisis or other solvency problems with the issuer.

Structured products are not suitable for all investors. Each product can exhibit very different characteristics as well as associated risks and rewards. They may appear to be fixed-income instruments, but may contain embedded options which do not necessarily reflect the risk of the issuing credit. These options may be 'plain vanilla' or highly leveraged exotic options.

As each is unique, the risks inherent in any one structured note may not be obvious. Hence, read carefully the prospectus or pricing statement, which explains the risks, tax treatment and other important information in detail.

Ultimately, it is your responsibility to protect your own interests. If you do not understand how the product works, seek clarification with your adviser. Don't buy anything that you do not understand.

Jag Kuo Soon Yong

Goodbye, Ricky Wong. Singapore Will Miss You

In latest developments regarding Singapore's NGNBN, City Telecom, formerly the consortium lead of Infinity consortium, has pulled out of the race for NetCo, reports Reuters:

StarHub leads group in S'pore broadband network bid
Wed Aug 20, 2008 1:13am EDT

SINGAPORE, Aug 20 (Reuters) - StarHub Ltd, Singapore's No. 2 telecoms firm, will lead the consortium bidding to build the city-state's next-generation broadband network, consortium member MobileOne said on Wednesday. StarHub replaces Hong Kong's City Telecom (CTI) who has dropped out.

Qatar Investment Authority, the Middle Eastern state's investment vehicle, has also joined the consortium, the statement said. (Reporting by Jennifer Tan; Edited by Saeed Azhar)

© Thomson Reuters 2008.

The silence of City Telecom on why this happened will certainly leave interested observers puzzled and curious as to the cause of this recent events. This is especially so considering the tremendous enthusiasm displayed by Ricky Wong, CEO of City Telecom and de facto leader of Infinity, for Singapore's NGNBN.

Ricky's interview with the Business Times demonstrated that he was a man with a dream – to ensure that in five years there would be fibre to most homes in Singapore. Ricky's vision was for Singapore, along with Hong Kong, to become a model for the rest of the world.

"The Americans and Europeans will come here to learn and follow us. We will become the technology leaders.”

This was a dream that would surely have benefited Singapore, and Mr Wong reckoned that tech-savvy people worldwide would then see that Singapore would be the best place to live, work and play – better than Silicon Valley, because it would have the best infrastructure. Unfortunately, for better or for worse, Ricky and his team are no longer in the running for the multi-billion dollar NGNBN project.

Can Infinity deliver without him? CTI's departure must have been due to significant developments in the NGNBN NetCo tender. Starhub and M1 are still around, but CTI's involvement was Infinity's trump card. CTI's unparalled experience with FTTH networks in Hong Kong is no longer part of Infinity's package. Now that the Hong Kongnese are no longer around, one wonders how much steam there is left in Infinity's bid.

Meanwhile, OpenNet's consortium members will surely be quietly smiling to themselves in the light of this new development. With CTI gone, there is no foreign technical expertise in the Infinity consortium, OpenNet will surely hold the edge with Axia's solid experience in operating open access fibre networks, along with mighty SingTel backing the group.

Yet, the tender process is not over, and we might see surprises again.

But for now, all I can say is, goodbye Ricky. Your vision for Singapore was an inspiring, compelling one. Those who knew your vision for the country will surely miss you.