The Minibond debacle engulfing both the Hong Kong and Singapore structured products industries has provoked a flurry of blogging activity from the Asian region. Blog subjects have ranged from outright attacks on product issuers, distributors and regulators condemning the selling of the financial instruments to retail investors. Other blogs have taken aim at regional publications which have posited that the blame should not rest on product providers’ and distributors’ shoulders alone but with investors too. The ‘unbiased’ blogging blame game certainly has no shortage of villains.
There are a number of issues that need clearing up. Firstly, this blog agrees with the majority of other posts out there that products with such a risk to capital should have been sold to retirees only under the strictest of circumstances. Selling any type of investment, where the risk of capital loss is high, to a pensioner is immoral and laughable. However many distributors have, admirably, decided to implement a compensation programme for vulnerable investors, although the definition of a vulnerable investor is a bit too exclusive (The definition in Singapore: if an investor was over 62 years of age at the time of purchasing the product and only has a primary school education). The compensation scheme is an admission of guilt and the regulators have done well to assuage institutions in admitting fault and rectifying the situation.
Secondly, if distributors, as is claimed by some investors, sold products under the pretence that the investments were similar to deposits there is no doubt of misselling and appropriate action should be taken. But here is where the ultimate problem lies. Investors should have read the full prospectus of the products, where every risk is explicitly stated. In every Minibond prospectus there is an explanation of what would happen to the product should the swap counterparty, Lehman, go bankrupt. Anything short of a comprehensive read is wilful ignorance on the investors’ part. Yes some investors were duped and may not have been given the product prospectus, but the majority of investors should have known better. Unless of course investors were banking on the Fed saving Lehman, then the blame should settle firmly with US Treasury Secretary Hank Paulson.
Thirdly, investors have most cause to complain over the fact that many Minibond issues used supposedly triple-A rated CDOs as underlying collateral. In the next few weeks the value of these collateral tranches will be revealed and it has to be said that market participants are not expecting high percentages. Investors cannot be blamed for buying a product with triple-rated collateral. But who is to blame? The ratings agencies of course. Even if Lehman had not gone bankrupt some of the Minibond products would have redeemed well below 100%. It is likely investors will soon take aim at the rating crew.
