A bitter lesson in investor responsibility

PUBLISHED : Saturday, 11 October, 2008, 12:00am
UPDATED : Saturday, 11 October, 2008, 12:00am

The following is almost certain not to be a crowd pleaser, indeed it might be considered heartless. Yet some things need to be said, however unpopular they may be. The stark truth is that the government has no business getting involved in the rescue of Lehman Brothers minibond holders.

There is a role for government agencies to investigate misleading sales of investment products and, certainly, it should look into sales by unauthorised persons. But, once the government travels down the road of trying to secure recovery of investments that have gone sour, it is heading down an endless highway with many ports of call.

There comes a time when investors have to be responsible for their own decisions, which is why caveat emptor or 'let the buyer beware' is the golden rule of all investment decisions. These minibonds did not appear to be a particularly risky investment proposition and, in normal times, there is no reason to suppose they would have been. So investors took a reasonable risk to secure a better return on their investment.

The key word here however is 'risk' because, for every prospect of a better return, there is an added element of risk. Were it otherwise, everyone could gamble to their heart's content, safe in the knowledge that no risk was involved.

In this instance, the prospect of risk has been realised and those taking the risk have charged off to the government expecting it to take responsibility for their gamble. Lamentably, the government and Hong Kong politicians have responded to these pleas - admittedly, only some have the audacity to suggest that these investments should be repaid by the state - but all agree that the government needs to do something.

Let's be very clear about what a government repayment of this investment means - that all taxpayers who declined to be part of this gamble are expected to take responsibility for its consequences. The government, wisely, has not succumbed to pressure for repayment but has taken on itself the initiative to negotiate with the banks holding the underlying loans to ensure that some of the capital invested will be repaid.

Less publicised is the way in which another arm of government, the Securities and Futures Commission, banned Lehman from settling trades before it collapsed. The tiny window that remained open for some means of extricating investors from this investment was thus firmly shut.

This is a relatively minor issue compared with the moral and greater economic risk of forcing the state to extricate investors from bad investment decisions. One minibond investor told this newspaper: 'We get a refund if we buy tainted milk. We bought 'tainted' bonds so why can't the government use public money in this case?'

The answer is twofold: first, refunds on tainted milk came not from the government but from the suppliers of an unsafe product. Second, buyers of milk products were not making an investment, with all the risk this entails; they were simply purchasing a product that they had reason to believe was safe to consume.

The brutal truth is that Lehman minibond investors are on their own and, if they have a case for repayment, it can only be made to those who were parties to the original deal. The government has no standing in this matter whatsoever.

But it is easy to see why expectations of government intervention are so high because Hong Kong's supposedly free-enterprise-minded government is a regular and massive intervener in the economy.

It famously made the biggest ever state-sponsored swoop on the stock market in 1998 to help boost share prices and it fiddles endlessly with maintaining the exchange rate against the US dollar. When it comes to the wider economy, it invests lavishly in all manner of projects, from the fantastic at Disneyland to Hong Kong's very own bridge to nowhere that will end up in Zhuhai.

Stephen Vines is a Hong Kong-based journalist and entrepreneur