• Mon
  • Dec 22, 2014
  • Updated: 12:14am

Of human mini-bondage

PUBLISHED : Sunday, 03 April, 2011, 12:00am
UPDATED : Sunday, 03 April, 2011, 12:00am
 

Does persistence and sheer bloody-mindedness pay off? Indeed, is it wise for investors to take on powerful financial institutions when they appear to have the backing of official regulatory bodies?

It is worth posing these questions to the noisy and vociferous people who have been gathering outside various banks in Central for the past two years demanding the return of money from defaulted Lehman Brothers Holdings minibonds that were sold, or maybe that should be mis-sold, by 16 banks in Hong Kong.

In 2009, the bond holders were given a 60 per cent repayment for their losses, now a maximum of 96.5 per cent is being offered as a 'final' settlement. Of the 43,700 people in Hong Kong that bought these bonds it is said 96 per cent accepted the original offer, although they will now benefit from the enhanced payout.

The Securities and Futures Commission appears to be trying to take credit for this settlement. Speaking this week, Mark Steward, the commission's executive director of enforcement, stressed that the protesters had no impact on the improved offer.

It is, of course, quite possible that the official body charged with protecting the public's financial interests in this matter is immune from public pressure. But it is hard to believe that silence from Lehman minibond holders would have lowered the pressure on the banks to pay better compensation.

It should be stressed that the much-repeated, but misleading, headline figure of 96.5 per cent will be repaid to very few bondholders. At the moment the banks are promising a maximum repayment of 93 per cent and that only applies to two tranches of the bonds issued. So no more than 4 per cent of bondholders will qualify for the return of about 90 per cent of their money, 65 per cent will receive repayments of 80-90 per cent and the rest will get about 70 per cent. That may well be why the holder's representatives remain unhappy.

However, they should recognise a victory when they see it - and it is a victory - against formidable odds because few institutions are so powerful in Hong Kong as the banks, and few regulatory authorities elsewhere in the world are so happy to accommodate them.

Yet there are some basic questions to be asked which revolve around the issue of so called moral hazard. This piece of jargon is most usually employed in financial circles and in plain English refers to the problem of investors not accepting the consequences of their actions.

In the case of the Lehman minibonds the issue is not clear cut because there is evidence that these bonds were frequently sold as low-risk investments with a purported guaranteed return. Indeed, the very use of the term 'bond' implied something that was safe.

They were not bonds but quite complicated structured credit derivative products based on credit default swaps, the complexity of which baffles even quite experienced investors.

Lehman put together these credit instruments using special-purpose investment vehicles to package these 'bonds' and sell them through banks in Hong Kong and Singapore but significantly not in the more tightly regulated United States market. Had Lehman not collapsed in 2008 there is no particular reason to believe that these instruments would not have survived.

Lehman had good credit ratings and was, at this time, one of the biggest investment banks in New York so there was no compelling reason for Hong Kong investors to have doubted its credentials - however this is a timely reminder that even the mightiest can tumble.

According to the SFC, the value of the 'bonds' issued in Hong Kong amounted to HK$15.6 billion. They were not listed. The word 'mini' refers to the relatively small amount required to buy each 'bond' which in some cases was a minimum of HK$40,000, although most were sold in HK$50,000 units.

They were marketed in Chinese as 'guaranteed mini-bonds' but the small print of the offer documents did indeed reveal that they were something else and it was stated that there was no protection for the initial investment. It is most unlikely that the majority of investors paid any attention to this, yet it was their responsibility to do so, hence the situation of moral hazard.

It is not hard to imagine how these bonds were sold to hapless investors who were offered a choice between traditionally safe low-yielding investments and what looked like a much higher-yielding instrument presented as a bond and promising to pay back far more than any traditional bond. As ever in the world of investment - if something looks too good to be true it almost certainly is.

In theory investors have only themselves to blame for not understanding the true nature of their investment but that does not absolve the sellers of these instruments from blame for the way they sold them.

However, the banks were rapidly let off the hook when the SFC agreed to drop further investigations into the sale and distribution of minibonds after they made the first payback. Later, the Hong Kong Monetary Authority proposed a series of enhanced investor protection measures including the separation of deposit-taking activities from investment-selling activities in bank branches and said all conversations related to sales of investment products should be recorded.

These protection measures are still under discussion but banks have begun reading out risk statements to their customers. The simple expedient of giving investors a cooling off period before making a final decision on their investments has disappeared into the ether.

Share

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

 
 
 
 
 

Login

SCMP.com Account

or