Monday, November 10, 2008

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:


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


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.


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, 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


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!!! =)