Monday, October 27, 2008

MAS responsibility in Minibonds-- Moral Hazards

The reason I feel that MAS has failed miserably in its role of a regulator is basically because it has failed to identify the MORAL HAZARDS involved in the structure of Lehman Brothers Minibonds.

First of all, the mention of the Six reference entities that consists of big names in the banking industry is TOTALLY MISLEADING, especially so when the risk that involves in the basket of Collateral Assets were not mentioned. In fact, as far as I know, at the time of sales, the list of 150 companies and their derivatives, were not even identified to the investors! How could anyone, be it MAS, banks or investors, really evaluate the TOTAL RISKS involved in this Minibonds if the bulk of risk that lies in this list of 150 companies was not even identified?

This is why I am very puzzled why this Minibonds has been approved by MAS to be sold to consumers VIA BANKS if the risk nature of it was not determined fully.

Secondly, there is an obvious MORAL HAZARDS that lies within this structure of Minibonds. The two SWAP PARTIES are actually the SAME! Minibonds Ltd is just an empty shell company created and owned by Lehman Brothers!

And due to the way that this Minibonds is structured, it would then mean that in the interests of Lehman Brothers, money invested by investors would be used to buy derivatives that would give the highest return while all these returns would be all given to Lehman Brothers. But in return Lehman Brothers would only give 5.1% to investors while investors would have to bear the risks of that Minibonds has taken, for the benefits of Lehman Brothers, in investing in all these high risk derivatives!

This is a CLEAR indication of MORAL HAZARDS. There is basically NO PROTECTION of investors' interests in preventing of taking too much risks for that amount of 5.1% return.

No investors would have known Minibonds Ltd is RELATED or even CONTROLLED by Lehman Brothers itself. And no investors would know EXACTLY HOW MUCH RISKS they are taking because the list of 150 companies and their derivatives was not even determined at the point of sales. This may explain why sales representatives would mislead investors into thinking that their money would be invested in the six reference banks or even Lehman Brothers itself! They may not even know the existence of the 150 companies' derivatives as in the Collateral Assets! How would a sales representative sell something that they don't even know what they are selling in the very first place?

The more I look at the whole structure, the more I feel that MAS has failed miserably as a regulator and YET, there are people who would claim this got nothing to do with the Government! How could PAP government that pride itself as World Class, filled with high paid elites, could ever allow such TOTALLY FLAWED and TOXIC financial products to be sold in Singapore is really something I could not understand.

Goh Meng Seng

1 comment:

Morally Hazardous said...

Moral hazard is also when you know the Gahmen will bail you out, no matter what.

So might as well buy any kind of lau pok investment, bochap reading the contract. If any problem, even if I am powderful graduate, I just say "actually this was mis-sold to me" and ask for bailout.