Flush DBS High Notes 5 Down The Drain

The banks have made a big show of solving the small-money cases.

Hong Leong Finance said it will compensate investors with a primary school education and aged 62 or older at the time of purchase. The company did not say how many of its customers fall into this narrow category.

DBS issued $100 million of High Notes 5 that are now worthless. It will pay out $70 to $80 million to compensate customers for its mis-selling. The $70m to $80m also includes customers in Hong Kong.

Hong Kong sales include products like Minibonds which a bank could buy back, hold to maturity and redeem at or near full value. It would cost the bank little or nothing.

DBS can’t do that with the $100 million in the High Notes 5 it sold here because those have defaulted. Their value is zero.

Source: Asia One Business

After a prolonged wait for embattled investors who bought into Lehman linked products, their worst fears have been confirmed. While mediation for Hong Kong Lehman minibond investors is currently underway, for those who purchased DBS High Notes 5, they might as well flush them down the drain.

Investors or rather bank customers paid ten of thousands of dollars to learn about capital protected funds, credit event, first-to-default, structured products, derivatives and most importantly, the omnipotent, caveat emptor.

The common complaints we have heard so far imply devastating cases of mis-selling.

1. “All my savings. They said it was safe, that I’d get interest every three months, enough for my daily expenditure. So I listened to them. Before that, I used to just put my money in fixed deposit.”

2. “They said it was linked with eight underlying assets, and if one was in trouble, there’s still another seven. But now, information from the press and DBS says the remainder of the investment is almost zero. We, as victims feel the bank has tricked us.”

I am a strong advocate of people taking responsibility for their own investment decisions. For many stock investors, they are not having a good time right now with losses mounting to as much as 50% but if we studied the numbers and took our own counsel, there is nobody to blame.

I have no problems with people who knowingly participate when the risks are fully disclosed. Any financial planner will know that the cash hoard of retirees is actually money they cannot afford to lose and must be placed in income-producing assets rather than growth stocks.

If it is made clear that the entire nest egg will be lost when any one entity of the structured products fails, and the investor choose to go ahead, fine.

However, in the case of all these Lehman linked products, there is undeniable rampant mis-selling. Deception and misrepresentation should not be the cornerstones of our financial hub. See this case of a saving plans turning out to be an investment policy.

My question is whether we want the banks to make money by playing around the edges of legality and destroy the good name which we have painstakingly build up over the past 4 decades.

Let’s take a leaf out of J.P. Morgan, Jr’s philosophy of wanting his bank to be known for ‘doing only first-class business… in a first-class way.’ This is a statement he made before the Sub-Committee of the Committee on Banking and Currency of the U.S. Senate in 1933.

The banker is a member of a profession practiced since the middle ages. There has grown up a code of professional ethics and customs, on the observance of which depend his reputation, his fortune, and his usefulness to the community in which he works.

Some bankers are not as observant of this code as they should be; but if, in the exercise of his profession, the banker disregards this code – which could never be expressed in legislation, but has a force far greater than any law – he will sacrifice his credit.

This credit is his most valuable possession; it is the result of years of fair and honorable dealing and, while it may be quickly lost, once lost cannot be restored for a long time, if ever. The banker must at all times conduct himself so as to justify the confidence of his clients in him and thus preserve it for his successors.

Warren Buffett often remind his CEOs that they can “lose a lot of money but they cannot lose reputation, not even a shred of it.” This message was reinforced when Buffett testified before Congress and placed his reputation on the line to save Salomon Brothers.

To rein in the wild, primitive nature of traders in Salomon Brothers and commit to setting fraudulent/inappropriate practices right when he was the interim chairman, Warren Buffett said emphatically: “Lose money for the firm (Salomon) and I will be understanding. Lose a shred of reputation and I will be ruthless.”

So far, I think the MAS and PM Lee has handled the situation in a professional manner, sending the message of “doing the right thing” and the dangers of losing reputation. But tough action needs to be taken ultimately on the wrong-doers and more importantly, to reform the industry to prevent similar cases of mis-selling, instead of just talking.

As neutrals, we are still watching how the drama unfolds. How will justice eventually be served to financial institutions who took advantage of “vulnerable” and “not so vulnerable” investors? Stay tuned for more updates.

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2 Responses to Flush DBS High Notes 5 Down The Drain

  1. Pingback: The Singapore Daily » Blog Archive » Daily SG: 31 Oct 2008

  2. Pingback: The Singapore Daily » Blog Archive » Weekly Roundup: Week 44

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