Lehman burns HK's low-risk investors
By Kent Ewing
HONG KONG - Thousands of Hong Kong retail investors have seen their savings
disintegrate after buying what they thought was a low-risk product from failed
US investment bank Lehman Brothers.
Amid calls for the ruined investors, many retirees, to show restraint and calm,
the city's two chief financial regulatory institutions are pointing fingers at
each other and have yet to come up with a solution that includes any form of
restitution.
Calls are growing for the government of Hong Kong, hailed as the world's freest
economy, to intervene in the incident and to strengthen its supervision on the
imports of "tainted" financial
products from Wall Street into this international financial center.
The thousands of small investors involved, many of whom unwittingly gambled
away their life savings, now hold worthless so-called "mini-bonds" linked to
the failed US investment bank.
Lehman, once the fourth-largest US investment bank, turned into the biggest
bankruptcy in history after suffering billions of dollars in losses related to
the credit crisis gripping Wall Street and spreading throughout the world.
Before the bank went down, its mini-bonds were hawked to credulous investors in
Hong Kong without so much as a caution from either the Hong Kong Monetary
Authority (HKMA), the city's de facto central bank, or the Securities and
Futures Commission (SFC), the independent statutory body charged with
regulating Hong Kong's securities market.
The Hong Kong & Shanghai Banking Corp (the local unit of HSBC Holdings) is
the trustee of the mini-bonds. About 10,000 investors are reported to be
affected. HSBC has yet to make a public statement on the topic. A prospectus
for a proposed mini-bond issue in 2002 stated that "Neither the trustee ... the
swap guarantor [Lehman], the arranger [again Lehman], [nor] the underlying
securities issuer ... has any obligation to any noteholder for payment,"
according to a South China Morning Post report.
According to the government, HK$12.7 billion (more than US$1.6 billion) was
invested in the mini-bonds, while another HK$3 million was invested in
credit-linked notes related to Lehman Brothers.
A little oversight and investor education might have saved investors.
First, the mini-bonds were misnamed, giving the appearance of being a
relatively safe bet. As it turned out, however, these so-called bonds,
advertised as "low-risk" at many of the 21 licensed banks that sold them, were
actually complexly structured, high-risk, credit-linked notes, which are in
fact high-risk credit derivative products based on gambling-like credit default
swaps. These derivatives are so complicated that even some local financial
experts have difficulty understanding and explaining how they work.
Yet such products were sold in Hong Kong in the name of "bonds", with the
adjective "mini" being explained as indicating a smaller required minimum
investment (HK$50,000) than regular bonds (normally requiring HK$1 million),
making them affordable to many small investors.
Launched in 2002, the Lehman mini-bonds quickly attracted a reputation as a
safe haven for retail investors. Many, including well-educated residents, were
led to believe they actually had bought "bonds" that were low risk.
One university professor spent all his savings, several million HK dollars, to
buy the mini-bonds. "I really believed it was a bond. Its coupon was 4%, which
I thought was low so the risk should be low," he said.
Stories now abound of retirees and others who lost all or a signifant part of
their life savings because they did not understand the investment risk.
Hundreds have taken to the streets and community halls in protest, demanding
action against the banks that led them to believe the mini-bonds were as safe
as time deposits.
On Saturday, 70 investors demanding the return of their money stormed the
Garden Road headquarters of the Bank of China (BOC), one of the issuers of the
mini-bonds. After bank staff refused to meet with them, security guards
intervened to prevent investors from forcibly entering the bank.
Secretary for Financial Services and the Treasury Chan Ka-keung has promised a
thorough government review of regulations for derivative products, which will
probably lead to much-needed reforms, but these will come too late for the
investors concerned.
On Monday, HK Financial Secretary John Tsang Chun-wah appealed to holders of
the mini-bonds to remain cool-minded and rational. "They can file complaints if
they have problems," he said. "They should first contact the selling banks. And
if they have complaints, they should make them with the Hong Kong Monetary
Authority, which has already allocated resources to deal with the issue.
"The Hong Kong Association of Banks has also set up an ad hoc group to handle
the issue. Some solution is expected to be found soon. The HKMA will see
whether there were irregularities [on the part of banks] involved."
Pressure is growing for the government to bail out irate investors - not the
way things are supposed to work in a city that is often touted as the world's
freest economy.
As in the US, politicians are jumping into the controversy, exploiting it to
put a further dent the already sinking popularity of the government of Chief
Executive Donald Tsang Yam-kuen. Radical legislator Leung Kwok-hung (popularly
known as "Long Hair" for his shoulder-length mane) played a role in the
storming of the BOC and the Democratic Party and Civic Party, both bastions of
pro-democracy, anti-Beijing sentiment, have blamed the government for the
mini-bonds disaster and demanded justice for cheated investors.
"Many of these investors are old people relying on these investments to support
their retirement," said Democratic Party chairman Albert Ho Chun-yan. "We need
intervention from the government and the financial experts."
In a telephone survey conducted by Ho's party, 52.5% of those interviewed said
they had lost confidence in financial products in the wake of the mini-bond
debacle, and 45.5% blamed the government for lax oversight.
Calls are growing for the the government of this free-port city also to
strengthen its supervision on the imports of "tainted" financial products from
Wall Street.
Criticizing the slow reaction of the HKMA, Civic Party legislator Audrey Eu
Yuet-mee vowed to form a legislative committee to investigate the scandal if
the authority does not act with greater speed and force to protect investors.
Eu and party colleagues called on the HKMA to force banks that sold the
mini-bonds to fast-track their investigations and proposed that the authority
appoint independent parties to deal with complaints and conduct disciplinary
hearings.
With the issue becoming increasingly politicized, the pressure is on the
government to act. Some of the confusion over the mini-bonds arose because
their sale fell into a regulatory grey zone between the SFC and the HKMA.
The SFC, which requires all brokers to make clear to clients the risk of any
potential investment, is investigating three licensed brokers for alleged
mis-selling of the products. But the commission's authority does not extend to
employees at any of the 21 banks that sold the product. These banks are
overseen by the HKMA, which is traditionally not a securities regulator and has
only belatedly begun to address the problem.
As banks have increasingly taken over the traditional territory of investment
brokers, the HKMA is obviously out of step, reflecting a growing view of
central banks the world over as they struggle to control the growing and now
global financial crisis emerging out of the US subprime crisis.
As Hong Kong's mini-bond disaster demonstrates, in the end it is the most
vulnerable who are being hit the hardest.
Kent Ewing is a Hong Kong-based teacher and writer. He can be reached at
kewing@hkis.edu.hk.
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