Unlike equity-linked products like accumulators, investors of Minibonds have primarily suffered from credit risk arising from Lehman's bankruptcy. Of course, Minibonds are complex structured products carrying at least 3 dimension of credit risk - Lehman (as the guarantor), underlying CDOs (as security) as well as those referenced entities (under the credit default swap arrangement).
Are Minibonds high risk products? Before Lehman's bankruptcy, banks had a ground to argue that they were not because all of Lehman, CDOs and referenced entities had good credit ratings. After Lehman collapsed and the subprime crisis caused a substantial devaluation (market risk) of CDOs, of course we could say Minibonds are very dangerous. But is it a hindsight?
Undoubtedly Lehman's collapse was a rare disaster, same as an aeroplane accident. But could we logically deduct that taking an flight is a high risk behavior because they were aeroplane accidents in the past? If Minibonds are high risk products, then time deposits should also be so classified because banks could also collapse.
Of course I won't say banks had no mis-selling of Minibonds, but the problem is not so simply understood as selling of products with wrong risk classifications. The actual responsibilities which might not be fully discharged by those distributors of Minibonds are:
- To ensure that the investors fully understand ALL underlying risk factors of Minibonds;
- To alert the investors the increase in risk of holding Minibonds when the subprime crisis has burst; and
- To advise the investors that they should never put all or most of their stakes at one product or one counterparty.
I think ignorance and over-concentration are the true risks of investing in Minibonds.
I agree.
ReplyDeleteI am sick of seeing those politicans using whatever opportunities to attract attention while themselves are not really understand the fundamental issues in question. I also sick of seeing bank promote investment services to general customers (one reason being that it is a very lucrative service) and those investment dept people (securities investment dept; treasury dept) looking down on other people of other functions because they e.g. are not lucrative profit centres or they are cost centres.
Banks are not really doing banking business nowadays. Under the Banking Ordinance, only very limited catagories of businesses are classified as banking business.
Somehow I have the feeling that if such investment services are not provided by "banks"; people could have been more cautious. People always claim that they trust banks because they are banks. They don't know banks are not doing banking business.
Such investment services could be offered by other insitutions e.g. securities houses (could belong to a bank) with tougher suitability test and more stringent compliance rules. This could at least avoid the situation that "banking" (conceived as save) is "risk" in disguise.
The world is changing. After experiencing so many financial crises, people could realize that banks are not absolutely trustworthy. Rather than prohibiting banks from offering non-traditional services, it is more necessary to educate the general public in choosing the right bank.
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