Tuesday, October 28, 2008

The Minibonds Continued

I've been reading some comments on Tan Kin Lian's blog post, here and here.

Some of the points that I have raised in my post have been addressed by the various commentators on Tan Kin Lian's blog. To summarise, the points are:

  1. That the Minibonds were marketed in a way that did not fully disclose their risks; and
  2. That the differences in interest rates between fixed deposits and minibonds were so small that no sane person would have taken the risk of credit default just to get that extra returns if the risk had been properly disclosed.
I have two responses: hindsight bias, wilful ignorance and self-serving bias.


Yes, I agree that there is some level of misselling involved in the Minibonds. However, I also think that there is some level of misselling involved in EVERY structured financial product out there. What makes the Minibonds so special?

I think that the differences in interest rates between fixed deposits and Minibonds is a fair argument, but one that is ultimately tainted by hindsight bias. Essentially, the argument is that investors who sought a safe investment invested in this product because they thought Minibonds were safe. And now that they are proven not to be safe, they want their money back.

The problem is, back in 2006 - 2007, Minibonds WERE thought to be safe. No one who bought the Minibonds back in 2006 - 2007 that Lehman Brothers would go under.

My question here is this: Did you really think that the increase in returns for the Minibonds as compared to the FD would come for free? If you didn't, then congrats, you made an error of judgment, and have no one to blame but yourself, but at least you have the moral courage to admit to yourself that you took increased risk for increased returns.

However, if you thought that you essentially got a free lunch, then it would probably be because you thought the credit event would never happen. Except it did. And you cannot possibily be in the wrong because, well, you're not.

Except that you are. Because what you are doing is looking at the investment with the benefit of hindsight, realizing that the investment were not as safe as YOU THOUGHT THEY WERE, and grasping for every bit of wrongdoing available to absolve you from responsibility of your bad decision.

THAT is why I don't think the Minibond investors should have any more compensation than any other sort of investor - because they made the same error of judgment that everyone else made in the market, but they are getting absolved from their responsibility without admitting any errors on their own part.

That makes me sick.


The second issue here is why I draw a distinction between Uncles and Aunties asking for their money back and every other investor. Uncles and Aunties have no capability of finding out what their risk profile is, while the average investor (presumably fairly well-educated) does.

The question is not whether the investors know about their risk profile. The question is whether they have the means to find out.

In the former case, the Uncles and Aunties don't. They are fully reliant on the banking-sales-persons to tell them what exactly their investment entails. In this case, the misselling involved has an aggravated effect, and it would be just and fair to compensate these people.

In the latter case, what we have is wilful ignorance. They have the option of finding out more about their investment instead of listening to everything their salesman tells them. Had this been a sports car rather than a financial product I suspect that this would exactly have been the case. Except it wasn't.

The sole concession I will make is that prospectuses aren't the most legible of disclosure tools. Still, a basic principle applies - if you don't understand it, why did you invest in it? You wouldn't do that for a car, or a house or any other major purchase in your life.


Given these two factors, I will bring on my third point - that it is entirely possible that your average investor believes himself to be an innocent victim, even though he is not.

The problem here is that it is very human to intepret an ambigious situation to your advantage. As argued before, the situation is VERY ambigious. The banks are at fault, the individual bankers are at fault, the institution is at fault, and the individual investor is also at fault.

I believe that is what is happening in this situation: everyone is pointing fingers at everyone else EXCEPT themselves, in hopes that in the confusion, someone will relieve them of the burden of their bad decision.


I do not believe these to be theoratical factors by far - I've argued these points from a very human perspective. I think talking to individual investors for the Minibonds saga is a surefire way of losing objectivity in this exercise - everyone is a victim in their own mind.

IF you want to be objective about this whole exercise, ask the important question - why are Minibond investors getting compensated while the buyers of other structured financial crap is getting diddly squat?


Yu Sarn said...

Well, I think everybody who was mis-sold structured financial crap should get their money back. It's misrepresentation and the remedy is rescission, i.e. money back.

Just because not all are getting a remedy they are entitled to doesn't mean that Minibonds holders who have been mis-sold should not.

Khayce said...

Unfortunately, because of the access to justice issue I wrote about earlier, that is exactly what I am saying - Minibonds are subject to collective action, everyone else is left to suffer on their own. Why is that?

Yu Sarn said...

There are other products out there that lost money, for example, the DBS High Notes series and the Merrill Lynch Jubilee series. All distributors of these products are required by MAS to put in place a complaints handling process. Check this out: http://www.mas.gov.sg/news_room/press_releases/2008/MAS_Sets_Out_Resolution_Process_and_Timeline_for_Investors_of_Structured_Products.html

However, for some reason, there isn't as much media frenzy about those.

I don't see unequal treatment here.