Lehman Brothers

Not all minibond buyers were innocent

PUBLISHED : Thursday, 07 June, 2012, 12:00am
UPDATED : Thursday, 07 June, 2012, 12:00am


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Local investors like to boast how clever they are - unless they bought Lehman Brothers minibonds and other related derivative products. These Lehman investors have since gone out of the way to profess being financial illiterates, ignoramuses and idiots. And playing the fool has mostly given them what they want. More than 30,000 of 43,700 buyers of the Lehman products have been paid back 60 cents to more than 96 cents on the dollar. Some of them are no doubt victims - the grannies, retired savers and poor workers - but not all or even most of them. It's justice for those real victims who have been given back their money. But it's a serious moral hazard when you refund those who play the fool.

The Lehman fiasco is populism gone wild, and the latest Legco report is a product of this. The report pretends most, if not all, minibond buyers were victims, while blaming everyone else. Of course, the regulators were at fault, as the report and previous investigations have pointed out. The banks and other financial companies deserve to be named and shamed in the more egregious, but not in all, cases.

Many buyers were hardly blameless. Much has been made about the complexity of the products sold, but you don't need to understand their full complicated structures to smell a rat. Throughout the past decade, bank deposit rates were in low single digits or near zero. Hence there was a frantic search for higher yields among local investors and even savers. Banks were only too happy to sell them alternative investments with high yields. Lehman's complicated derivative products were offering a 5 per cent coupon or more involving credit default swaps and collateralised debt obligations. You don't need to be a financial engineer to become suspicious of those high yields.

In the event, the products' complicated structures were not their undoing, as implied by many 'victims'. The problem was the collapse of Lehman and its associated entities, an event unforeseen by most people. You could have bought a vanilla Lehman bond or stock and still lost everything. Society pays a high price if investors who make bad bets can claim to be victims, and are compensated.