Monday, September 29, 2008

MiniBond- Allocation of Responsibility

I have gathered a couple of news articles from Hong Kong which give better perspective of the whole issue.

What is MiniBond in the very first place? The picture above is a simple illustration I gather from Hong Kong Economics Daily newspaper. Yes, it is written in Traditional Chinese and I hope you could read it well.

Anyway, in short, the whole Minibond instrument comprises two parts:

1) The AA or AAA bonds as the basis of the structure (Right side of the diagram)
2) The Credit Risks Swap which involves a Vehicle (in this case, Lehman Brother's collective of financial bonds and instruments).

The first part (right part of the diagram) of the instrument is easy to understand. The money paid by the investors are used to buy AA or better rated bonds. The coupon rate or interest payment by the bonds are given to the investors on an annual basis.

However, to increase the returns of this instrument, the bonds are used as the basis to provide "insurance" for the other vehicle, like a collection of bonds or derivatives or financial entities. In this case, Lehman Brothers' collection of financial instruments. It means that Lehman Brothers will give the bond holders a certain percentage of premium to exchange for protection of its own credit risks. This is what Credit Risks Swap all about.

Literally, it means that Lehman Brothers, as an financial institution, needs to insure its own credit risk of honoring all the bonds or financial derivatives it sold in the market. Instead of buying financial insurance from a insurance company (or reassurance companies), it chose to pay a risk premium to Minibonds holders in return for an insurance against any of its losses in the event of credit events that it suffers.

Why would Lehman Brothers pay a risk premium to Minibonds holders for such Credit Risks Swap rather than buying insurance from a insurance company? Most probably it is much cheaper to do a Credit Risks Swap than paying hefty insurance premiums for its own credit risks.

The amount of "additional returns" that a Minibond provides for its investors depends on who or what the Credit Risks Swap is done with. If the Credit Risks Swap involves a collection of Junk Bonds, then naturally, due to the higher risks of Junk Bonds, the return would be higher. In this case, prior to the collapse of Lehman Brothers, it was considered as a relatively "low risk" financial entity by virtue of the facts that it was the 4th largest Investment Bank in USA. Thus the overall return of Lehman Brothers Minibonds is relatively low.

Well, if everything goes well and there is no credit issues or events for Lehman Brothers' collection of financial instruments, the investors could get all the interests paid plus the AA bonds they paid for when the Minibonds matured. But if there is anything happen to Lehman Brothers, then they could have to compensate Lehman Brothers for its loss due to these credit events like bankruptcy or inability to fulfill its financial liabilities. i.e. The Minibonds holders are required under the agreement, to act as an insurer of Lehman Brothers. It means that the AA bonds that are bought under the Minibond agreement would be cashed out and used as a compensation to Lehman Brothers to fulfill the obligation of the Credit Risks Swap.

This is the interesting part, small investors acting as insurer of a big investment bank!

The various articles have suggested that the regulators have not taken a pro-active stand in regulating the sales of these financial instruments. In the mini-bond issue, the returns are "improved" by virtue of the credit risks swap taken up by the financial instruments. In this case, Lehman Brothers bond is the vehicle that the bonds has taken up the risks swap. Yes, nobody would consider Lehman Brothers as a "high risk" financial entity but that is also why the returns is just 5.1%. If the vehicle involves consist of junk bonds, then one would expect a higher return.

The crux of the matter is whether investors are being misled in the whole dealings. But I guess the contract or agreement they have signed would have a clause that says the investors are briefed and understood the product, including all the risks involved. This is where the banks or financial institutions have covered their backsides. But the contract would most probably be very vague on what kind of risks they have explained to the investors. This is where improvement on regulation could be made. SPECIFIC risks and possibilities must be stated CLEARLY in BOLD, not in fine prints.

Even if the regulators come up with the requirement of putting different categories on the different financial instruments being sold, it is difficult to classify Mini-Bonds which involves two parts of financial structures: Bonds + Credit Risks Swap. Unless the regulations include the declaration of all possibilities of defaults and risks involves, I would say that no matter how good the products are marketed and sold, there will always be investors who will claim ignorance. Where does it end?

While I empathize with many aunty and uncle investors, but the point is, if they are not sure about what they are buying, they should not buy it in the very first place. If all investment decision in any instruments is solely based on the returns alone, then I would say that our investors, including aunties and uncles, will not evolve smarter at all. That is why I feel that we need to strengthen investors education. The plight of these aunty uncle investors is really sympathetic but they could not avoid their part of responsibility. If they chose to invest blindly, then they will have to bear the consequences. Very sad but this is basically how capitalist system works. Unless they could prove that they are being misled with clear evidence of mis-selling or misrepresentation by the institutions.

From the legislative perspective, there are rules could be set to avoid such chaos and disputes. For example, if the financial institutions that sold the financial products did not list out in BOLD of the various risks and possibilities within the marketing tools, contracts and agreements, then if one of the unlisted possibilities occurred and losses are incurred, then the investors should have the right to claim compensations from the financial institutions that sold them the products. For example, in this case, if the contract did not list the possibility of Lehman Brothers being bankrupted and the implications behind it, then the consumers have the right to claim compensations from the financial Institutions for their losses.

This will shift the burden of legal responsibilities of clear representation of risks to the financial institutions. If their presentation of risks is not all inclusive, then they will have to bear the risks of taking losses.

But I bet even with that legislation, there will always be investors that would claim ignorance. I mean, how would one measure the risk of Lehman Brothers being bankrupted at that point of time when it was the 4th largest investment bank in USA? It has no end. One has to learn that near zero possibility is NOT IMPOSSIBLE. However small the risk and possibility it is, there is still risks involved.

In the case of Hong Kong handling the issue of this MiniBond saga, the main argument is that those front line sales personnels are hardly trained and knowledgeable about this product that they were selling. I mean, this is a VERY COMPLEX derivative product that involves very abstract concept of credit risks swap. I would say that if the investors want to fight their case, they would have to provide all the marketing brochures and such, to show that the financial institutions did not explain or show clearly what a credit risks swap is all about. Then they could argue that the contract they have signed with that clause of claiming the investors have understood the product and all the risks involved, are totally invalid because due to this missing part of explaining credit risks swap.

This is the only plausible legal point that grievance investors could bring up against the financial institutions.

In my view, the regulatory body, MAS must bear part of the responsibility too. If any financially trained individuals would have difficulty in understand what a Minibond is all about at first sight, I wonder why MAS would allow it to be sold by banks to layman in the very first place. There is a clear lack of regulatory requirement or directions or guidelines to make stringent demands on the marketing effort of such complex financial instruments.

Furthermore, I think for banks that use their front line tellers to push sales of Minibonds is very irresponsible. I really doubt the front line tellers really know what Credit Risks Swap is all about and least, have the ability to explain clearly the risks involved in Credit Risks Swap to the customers, especially to the less educated aunties and uncles. This is both the lapse of MAS regulatory role as well as the banks' irresponsible moves as well.

Most customers would trust the banks as a more credible financial entity than an insurance agent or so call "financial consultant". This is the psychological effect of any normal persons. If one could entrust his money in this bank, naturally there is a level of trust on the credibility of the banks. Thus, most of the time, consumers would buy such "high return" financial instruments by virtue of basic trust on the banks' credibility, even though the banks' front line sales personnels may not be able to explain in full what the products entailed.

MAS should stop this practice by the banks, by means of regulation. Banks cannot sell complex structured financial instruments via its front line tellers. In fact, in USA, there is a strict distinction between Commercial Banks vs Investment Banks. Commercial Banks could only earn their keeps by taking in deposits and loaning them out. They are strictly regulated and disallowed to get involved in dealings with financial instruments with high leverage. Invest Banks are those who created all these mess with their financial innovations on derivatives.

I would suggest MAS to put a stop to such practice by banks in dealing with high leverage financial instruments by putting up categorization of each and every financial instruments approved for sales in Singapore. For example, if the financial instruments have a category of C, it means that it is a high risk, high return and high leverage financial instruments. Commercial Banks should be banned from selling or dealing with such financial instruments. Category A would be Government or Commercial bonds with AA or AAA ratings. This would be allowed for commercial banks... so on and so forth.

In my view, although the investors should bear bigger responsibility in taking up investment decisions, but MAS and the banks selling these Minibonds or High Notes could be totally excused from their part of responsibilities. MAS has failed miserably as a regulator in providing a clear guidelines in the sales of such financial instruments to the public.

If the PAP government could order cigarette packaging to bear big warning of lung cancer as well as tax-paid labels, I wonder why MAS has not taken similar steps in requesting financial institutions to put up BOLD and clear representation of ALL risks and possibilities involved in investing in any financial instruments. Furthermore, MAS should have prevented banks from selling complex structured, high leverage or risky instruments to layman. This should only be done by professional financial consultants instead.

And last but not least, I think the banks that sold these Minibonds would have to bear a level of responsibility in pushing the sales of such complex instruments when even their front line sales personnels may have limited knowledge about it. In fact, I would think that their credibility in the eyes of the public would be badly tarnished if nothing is done to compensate for their inconsiderate sales of such instruments to less educated aunties and uncles.

As for the investors, I could only say that if you want to prove their case against mis-selling, you would have to gather all marketing tools and materials to show that those sales personnels did not explain clearly what Credit Risks Swap is all about. Its not going to be an easy task to fight such cases against strong, big and mighty but I guess if all of you could unite and come together to go for class actions against irresponsibility sales of such instruments, you may have the chance to prove your case that even if you have signed that contractual agreement that says you have understood all about the product, but in fact, you have not been told about what the heck is Credit Risks Swap.

But ultimately, every potential investors in any financial instruments, even for investment related life insurance, we should be responsible enough to find out more about all these products before we commit our hard earned money into them.

Good Luck to you guys.

Goh Meng Seng

Saturday, September 27, 2008

The Systematic Problems of Public Transport

A few weeks ago, I have given my first public speech at Hong Lim Park with regards to our "World Class" Transport System which is organized by TOC (The Online Citizens).

The following are the few points I raise and I have added a few thoughts thereafter. My whole speech central around the following 4 points.

1) Business Model
2) Economic Model
3) Efficiency
4) City-town planning

Business Model

1) Transport companies should not focus on getting profit from fares alone. In fact, if any transport companies thinks that it could make huge profits by charging higher fare, then the CEO should be sacked. If you have noticed, transport companies in HK, especially MTR, even the mini-bus, earns quite a bit from advertising. The business model should be similar to free software or services provided by Internet companies.

The main focus of public transport companies should be focusing to increase their customers' ridership. This is basically because advertising dollars depends on the number of commuters using their public transport services. With the prospect of increase in commuters, companies will be more willing to advertise their products with these public transport companies. This is the main reason why even Internet companies could make huge profits even without charging the massive usage of their services and software by the users. Examples are Yahoo, Google, MSN....etc. The list goes on.

Thus the priority of public transport companies should be looking into ways to increase ridership, not because they could collect more fares in return, but rather, they could increase their attractiveness as an advertising medium. This could be achieved by two main ways.

First, REDUCE fares, instead increasing fares. In my view, in Singapore's context of high cost of maintaining private cars (more ERPs, one of the highest petrol prices in the world..etc.), reducing fares may well increase ridership.

Secondly, increase efficiency and effectiveness of their public transport services. These could be achieved by increasing frequency of their services, instead of reducing their frequency in the bid to "cut cost", in the name of optimization.

I will deal with these focuses, but now, there is another macro problem we must look at before we go into efficiency and effectiveness.

Economic Model

2) To have sufficient advertisers in any economic model, competition is the paramount necessary condition. For example, you will not hear SingTel advertising back in 1980s basically because it was the only monopoly in the Telecommunications market. When more companies were allowed to compete in the market, advertising for Telecommunication services would increase substantially. In Singapore’s context, the problem with our economic model is that we have too many monopolies and oligopolies (few dominant companies dominating the whole industry) within the system.i.e. basically, GLCs dominates the whole economy.

Thus, unlike Hong Kong, there isn’t a huge group of SMEs with their own brands to put up advertising resulting in limited advertising dollars for the whole market. For example, for the Mooncake festival, Hong Kong would have quite a massive number of advertisement from the local various SMEs on MTR (train system) but in Singapore, we could hardly see any, or rather, I don’t see any.

This is a long lasting structural problem with our economy in which Government Linked Companies or companies with symbiotic relations with the ruling party are allowed to dominate and even crowd out competitors.

In Hong Kong, the Hong Kong government does not get involves in running companies or businesses within the economy as it would always be perceived as potential conflict of interests between a regulator vs those being regulated.

These Government Linked Companies are creating more structural problems than we could imagine. This leads to the following potential problems of Efficiency.


3) The government is the largest shareholder of local transport companies. There is basically a conflict of interests here, between the companies that they are supposed to regulate and the fact that they are the regulator themselves.

The PTC is set up to monitor fare hikes but the members of PTC includes members from the transport companies. The proper set up should include consumer representatives, opposition party members (or MPs) and business consultants. The transport companies could only be submitting their request and making their presentation on why they need a fare hike without any voting power within the PTC itself.

The PTC should be setting the service standards like timing or frequency for the transport companies during peak and off peak hours. In a small country like Singapore, it is really hard to imagine that we need to wait for more than 30 mins for a bus during off peak hours when someone just mention that we only need 20 mins to travel from any point to another point in Singapore. That is a bit ridiculous.

There is a lack of critical fundamental investment in the whole public transport system. We do not need fanciful stuff like satellite tracking system when the frequency of our bus system is comparable to third world country. While cities like Hong Kong have invested in more practical aspects of technological applications like location announcement system within the buses as well as the trains, more advanced rail track signaling system for the train that increase frequency, Singapore has not improved at all even though we pride ourselves as a technological advanced country.

Just to illustrate this point about more practical information system for the public transport. If you take a train, most likely it would be too noisy to hear the public announcement of the arrival at the various stops. In Hong Kong, you will have a visual LED system which will indicate which stop the train will be arriving and which door you should alight at. On top of that, it will show you at that stop, which train station you could alight and change to other train service lines. It is hard for you to get lost in the train system. Similarly, for the buses, right before the next stop, there will be visual LED screen indicating the stop location.

Furthermore, I do no think our train system is designed to cope with 4.5 million population, least 6.5 million. We have only 6 cabins in the train while Hong Kong MTR has 8 cabins. And the frequency of our train service is lower than Hong Kong, be it peak or off-peak hours.

On top of that, in order to cope with the huge massive number of commuters, Hong Kong train stations usually have more than one exit from the station building. This is to disperse human traffic flows. They have far more escalators in some of the busiest stations than ours. Sometimes, they would have two to three gate entrances and exits.

The most interesting part of the train system is that Hong Kongers are very practical and conscious about efficiency. Even small things like the Octopus Card (equivalent to our EZ-link card) top up machines, they do not need you to press buttons here and there before you could apply the right procedures like using Nets or paying cash. They would immediately wait for you either to swap your bank cards or insert your cash into the machine. Very straight forward. After you have finished with it, just press a button to retrieve your card. On the other hand, they will have a dedicate machine for you to check your balance card values as well as the charges you paid for the last 3 trips. Machines solely for that purpose so that you don't crowd out the other machines for such simple tasks.

All these designs have allowed the train system to cope with huge human traffic flows and increase in its overall efficiency for the consumers.

City-Town Planning

4) The city -planning model of Singapore affects the efficiency and effective use of public transport. You don’t find many high rise flats in town centres in Singapore which are also transportation nodal points. Instead, they like to plan so much that they have spread out the HDB flats but the Town Centre, ironically, nearest to transport services, were lack of residential flats. You can observe in HK that at every each main MTR stations, there will be many flats built above or just next to the stations, along with shopping malls and such. That is why it is very convenient for commuters and in return, it helps to secure high ridership. But here, we are made to stay far away from the transportation points, forced to take those inefficient feeder buses or worse, the light rail. Besides all these, MTR in HK have income from some of the building and managing estates right near their various stations.

The most typical failures of our town planning are demonstrated by the Punggol-Sengkang estates as well as the Ang Mo Kio Hub situated right next to the AMK MTR station.

In spite of launching the Punggol 21 vision one decade ago, land right next to Punggol MRT station has been left vacant until recently. Almost all the prime lands next to MRT stations are being monopolize or dominated by other GLCs. The SMRT, though a GLC itself, should have the first priority to develop the land near its stations basically because if it integrates the land use with its strategic needs to increase the efficiency of the public transport model, it could well be positioned to do so. In effect, it could cross subsidize the public transport commuters by having more income sources to cover the operation costs of the public transport system.

This is the kind of model that we should seriously consider to implement. There would be a need to reinvent and revamp the whole strategic thinking for the public transport system. Instead of focusing on increasing fares, cost cutting by reducing frequency and such, they should be focusing on how to increase utilization of the system and increasing revenues by virtue of the massive crowds they command. They are in the business of Mass public transport but they should be earning more from the MASS part instead of the fares collected from the TRANSPORT part.

We have a self proclaimed a highly paid First World Government who keeps boasting about building a World Class Public Transport System. However, for those of us who are well traveled to gain enough foreign exposures, I would say that our present Public Transport System is far from being World Class. Maybe not Third world standards, but it is definitely not World Class. There are much rooms for improvement, from city planning to realignment to the new business model.

In time to come, we will be facing a critical strain, overcrowding and crunch on our present public transport system if the relevant authorities do not act pro-actively to face the increase of population size due to huge influx of foreign workers. There is an urgent need to rebuild or re-evaluate the present structural deficiency to increase efficiency and capacity.

I do not think the fare increase in the coming month of October is justifiable if we do not see any moves or efforts by the public transport companies to come up with a solid blueprint on how they are going to improve their overall service efficiency.

Well, this is just life in Singapore as the masses will just suffer in silence.

Goh Meng Seng

Saturday, September 13, 2008

Thank you for your support!

I have a GREAT evening at Speakers'Corner today. All thanks the responsive crowd of over hundred audience from all walks of life. I have never expected such a crowd during off-election period and I think its a good start. At the very least, it means that down there, there are still people who care enough, with all passion, about this tiny little island to take all their effort to spend their precious Saturday evening down at Hong Lim to listen to us.

This GREAT EVENING would not have been possible without the responsive participation of these people. Of course, I would also like to thank TOC Chief editor, Andrew Loh, for inviting me to speak at this event. He has spent a couple of hundreds dollars on a portable amplifier with wireless microphone. I think that little gadget is really great for such an event!

Anyway, I am still waiting for any updates of video on Youtube before I write on what I have spoken at Hong Lim. Until then, stay tuned. :)

Goh Meng Seng

Thursday, September 11, 2008

My Maiden Speech at Hong Lim Park

It has never crossed my mind that I will ever speak at Hong Lim Park at all. Ever since its inception as "Speakers' Corner", I have never thought of going there to become a speaker myself.

I would actually prefer to "ambush" radio stations which have call-in programs once in a while. In fact, I have just done that a few days ago, calling in to 95.8 to talk about "protest culture". Why? Well, it really takes less effort and time to do so but the returns in terms of number of people I could outreach to, are pretty more in comparisons.

Making a speech face to face to your audience requires a very different set of skills. When the eyes meet, the challenge is to transcend your message deep down into your audiences' hearts. The atmosphere created, will be a direct product of your effective or ineffective interactions with your immediate audience. Calling into radio station will lack that direct emotional interactions with your audience.

The impact of a public speech can be a double edged sword. If the speaker is not skillful enough, the message may just be lost in the midst of boredom. It would be most advantageous to skillful and well prepared speakers to get their message across with long lasting impression.

However, you must first pass the first criteria, AUDIENCE. No matter how skillful you are as a public speaker, if you do not have any audience standing right in front of you, all effort will be wasted. This is the main reason why speaking in Hong Lim Park is not going to be attractive at all.

But my friend, Andrew Loh from The Online Citizen (TOC) has a different view. There could be a purpose in speaking up in Hong Lim Park if we organize it properly. As Singapore Netizens are very comfortable with typing away behind their keywords most of the time, it would be a good exercise for a change to get all bloggers and netizens down to Hong Lim Park and gather in real persons to listen to speeches. Besides, there is this one important topic that will affect many Singaporeans in time to come: Increase in Public Transport Fares.

Andrew personally invited me to speak at this TOC organized event. It will not be "just another event" by a civil group but may just be a real test of bringing in online "soft power influence" of virtual bloggers, forummers and netizens into the real life public sphere. It just reminds me of how I have stepped out of the comfort of virtual anonymity in 2001 to join WP and subsequently become more active in real life politics, ending up as an opposition candidate in GE 2006. It is indeed steep learning curve and character molding period for me personally.

Thus, when Andrew sent his invitation and stated that there would be three other (now four, including James Gomez) speakers speaking at the same event, same place, same time frame on the same topic, I really gave it a serious thought. This may be a ground breaking bridging exercise to bring online citizenry into real life participation in social-political concerns. We may just make it a new trendy culture for online citizens to practice their oracle skills once or twice a year at Hong Lim Park!

Thus my maiden speech at Hong Lim Park is set to go, with multiple purposes in mind. To encourage active REAL LIFE CITIZENRY, transferring active online citizenry to real life actions. To speak up on this dear topic that would most probably affect 60% or 70% of Singaporeans at large. Of course, for my own personal grooming, its about time to give some practice to my rusty public speaking skills. :)

See you there, folks. 13 September Saturday, 5pm to 7pm.

Goh Meng Seng

Tuesday, September 02, 2008


This is my letter to ZaoBao Forum.