Protests planned over credit-linked products

PUBLISHED : Monday, 01 June, 2009, 12:00am
UPDATED : Monday, 01 June, 2009, 12:00am

Angry investors are planning to take to the streets twice before staging a major rally on July 1 to push authorities to act against banks that sold them some HK$1.8 billion of credit-linked products that soured amid the credit crunch.

The products - Octave notes issued by Morgan Stanley - threatened to undermine Hong Kong's beleaguered finance sector, still reeling from the Lehman Brothers minibond fiasco, Democratic Party lawmaker Kam Nai-wai said at a meeting with investors yesterday. Protest marches are being planned to increase pressure on the government to act.

'Octave notes are a ticking time bomb because some investors are still receiving interest payments and are unaware of the deteriorating value of the products,' Peter Chan Kwong-yue, chairman of the Alliance of Lehman Brothers Victims, said.

A total of 18 series, numbered between 1 and 22, were sold through local banks. Series 15, 16, 21 and 22 were practically worthless now with a value of less than 1 HK cent per dollar invested, Mr Chan said. Series 8, 9, 17, 18, 19 and 20 retained less than 10 per cent of their original value. The remaining series had all lost more than half of their value, except for Series 1, which was still worth between 60 per cent and 70 per cent of its value.

Investors who subscribe to Octave notes receive interest payments on their principal amount, which is repaid at the end of the investment period. Under normal circumstances, Morgan Stanley would use the proceeds to invest in the notes' underlying securities. Cash flow received from these underlying securities would then be used by Morgan Stanley to pay investors in Octave notes.

But as corporations succumbed to the global financial meltdown, synthetic collateralised debt obligations contained in Octave notes quickly lost their value and many became virtually worthless.

'The bank staff told me that the product was very stable and that I would get my money back after four years and that the interest rate was high,' one investor said. 'I feel very disappointed. The government can't do anything to supervise the banks. These are high-risk products that are not easily understood by ordinary people and they should not be sold to ordinary investors.'

A Hong Kong Monetary Authority spokesman said last week that it had taken preventative steps. 'The HKMA has taken a number of steps, including the issuance of circulars and reminders, to ensure that banks implement adequate measures to manage the risks associated with retail investment products,' he said.