Tan Kin Lian asks: Is it fair? Investors answer: NO!

Written by Ng E-Jay
16 November 2008

The fifth rally organized by Mr Tan Kin Lian for investors of Lehman-linked structured products and other credit linked notes that have fallen drastically in value drew a record crowd on Sat, 15 Nov, with investors vociferously expressing their anger and dissatisfaction at MAS and the financial institutions for pussyfooting and failing to provide prompt and fair redress for their heavy losses.

Mr Tan Kin Lian began his speech by drawing attention to a new group of investors — people who have invested in the Pinnacle Notes series created by Morgan Stanley. Many of these credit linked notes, which typically run for a term of around 5 years, have had their value nearly obliterated even though they are not linked to the failed US bank Lehman Brothers.

For example, Pinnacle Notes 1 has only 1.8% of its original value left; Pinnacle Notes 2 has only 3.8%; Pinnacle Notes 8 has around 69%, and Pinnacle Notes 12 has around 80% of its value remaining as of last week.

More seriously, Pinnacle Notes 9 and 10 have had their value completely wiped out because at least 5 of the underlying 100 financial assets have gone into default.

Why are the Pinnacle Notes affected even though they are not linked to Lehman Brothers?

The answer is that the Pinnacle Notes are very similar in structure to the other structured products like the Lehman Minibonds and the DBS High Notes. Each of the Pinnacle Notes have several reference entities. If one of the reference entities goes bankrupt, the entire Note will go into default. In addition, each Pinnacle Note also invests in the credit instruments of around 100 underlying financial entities. If a certain number, say 5 to 10, of these underlying financial assets goes bust, the entire Note will also be obliterated. The latter event is precisely what happened to Pinnacle Notes 9 and 10.

Another question arises: What if there is a new swap counterparty for Lehman Brothers? Will investors be able to recoup their full principal sum at the maturity of the Lehman Minibonds?

Mr Tan Kin Lian’s reply was that he was not sure, as the value of the Minibonds will also depend on the performance of the underlying financial assets. If the underlying assets go into default, the Minibonds will be similarly affected even if all the other reference entities are still around.

Mr Tan recapitulated that he had already sent 3 petitions to MAS.

The first petition, dated 9 Oct and signed by 983 people, asked MAS to carry out an independent investigation into whether the financial institutions had breached the Securities and Futures Act or the Financial Advisers Act. Mr Tan had also sent a personal letter urging the Government to take action in the form of bringing the errant financial institutions to Court or negotiating with them to compensate investors duly, if indeed the law had been broken.

However after one month, there had been no concrete action from MAS, which had refused to meet or discuss the matter with Mr Tan. MAS had only announced that they could not discuss the issue with individual investors, but gave no indication as to whether there would be a full fledged independent investigation.

Mr Tan asked the crowd: “Is that fair?”

To which the crowd replied loudly: “NO!”

The second petition, dated 17 Oct and signed by 277 people, asked MAS to check on how the financial institutions had trained relationship managers and sales representatives.

The third petition, dated 31 Oct and signed by 1017 people, asked MAS to set up an independent unit for investors to lodge complaints, so that investors need not approach the financial institutions directly if they feel uncomfortable doing so. The petition also urged MAS to push for a collective settlement for all affected investors, rather than allowing the financial institutions to go on a case-by-case basis which would inevitably prejudice certain investors.

Next, Mr Tan Kin Lian brought to attention the recent remarks made by MM Lee Kuan Yew. MM Lee had said that many educated and young investors went into the Lehman-linked structured products with “their eyes open“. He also said: “Higher returns means higher risks. So when somebody tells you, ‘you get 1.5 per cent at the bank, I give you 5 per cent’, read the small print carefully.” (ST Online, “Lehman investors ‘aware of risks’”, 11 Nov 2008)

A person using the initials S.B. had written to Mr Tan expressing his anger at MM Lee’s comments. The writer said that an annual return of 5% was not commensurate with the amount of risk that the investors were taking, and that investors had been lulled into assuming the products were all right because they were approved by the authorities for sale. The writer admitted that he should shoulder some responsibility for his investment decisions, but added that MM Lee’s words sounded as if the authorities were taking investors to task, and that the case was closed as far as the Minister Mentor was concerned. The writer said that this gave him the impression that the Government had already taken the side of the financial institutions even without any solid evidence, and that this was unacceptable action from a popularly elected Government.

Mr Tan Kin Lian went on to mention that in his recent meeting with some primary school teachers, the teachers were of the opinion that the Government had done a good job by making sure older investors were compensated. Mr Tan was quick to give these teachers a reality check. He told them that the so-called “vulnerable investors” who were given prompt and full compensation only constituted less than 5% of the total number of affected investors. The teachers were shocked when they learned this. They realized that they had been mislead by the media into thinking many people had already been duly compensated.

Finally, Mr Tan asked why these highly defective credit linked Notes were only sold in Singapore, Hong Kong and Taiwan, and not in places like the US, Malaysia, or Australia?

The answer, sadly, was that if investment banks were to sell these defective products in places like America, they know they would be sued and forced to compensate investors the full principal amount, unlike places like Singapore where they have a chance of fooling investors and getting away with it. Places like Malaysia were also unlikely to approve these products for sale to retail investors or unsophisticated investors in the first place.

Mr Tan ended by saying that he hoped MAS would follow the example of the Hong Kong Legislative Council in carrying out a full fledged investigation and summoning banks to provide the necessary information about the sales process and the details of the transactions. Errant bankers should also be sent to jail if and when found guilty.

Mr Goh Meng Seng then gave a Chinese rendition of Mr Tan’s speech, as well as his own views on the matter.

He said: “This government only cares about the big corporations, what about its citizens?”

Mr Goh quoted the example of Hong Kong, where Minibond investors could pressure the Legislative Council (Legco) into launching a full probe into the banks because the Legco was not dominated by a single party. Here in Singapore, with only 2 opposition MPs in Parliament, the ruling party could do as it wished with flagrant disregard for the will of the people.

Mr Goh ended his speech by imploring the audience to “open their eyes” and “vote for the correct party” in the next election.

Read Also the following reports filed by Wayang Party Club:

LATEST from Hong Lim Park: Tension on the ground as troubled investors mulled their options

Interview with minibond investors at Hong Lim Park, 15 Nov 2008

Mr Tan Kin Lian’s speech at Hong Lim Park, 15 Nov 2008, Part 1

Mr Tan Kin Lian’s speech at Hong Lim Park, 15 Nov 2008, Part 2

Mr Tan Kin Lian’s speech at Hong Lim Park, 15 Nov 2008, Part 3

Mr Tan Kin Lian’s speech at Hong Lim Park, 15 Nov 2008, Part 4