Structured Finance

"Tell us clearly and simply about the risks involved in buying complex investment products".

Structured financial products is a hot topic in Singapore. This is not surprising given that thousands of investors here are reportedly facing potentially major losses after buying structured products linked to now-bankrupt Lehman Brothers.

By the way, structured products, as explained in an article in today's Straits Times, is "a class of investments involving the use of complex financial derivatives to deliver a steady annual return above traditional fixed deposits."

Relationship managers (financial advisors) at the local banks have been accused of being overly aggressive in pushing these products. And some customers said they (the financial advisors) have down-played the risks and misled them into thinking the structured products were actually issued - not merely marketed - by banking names they trusted.

This reminded me of an incident I encountered somewhile back: I went to a bank to close a dormant savings account, which had several thousand dollars in it. The bank teller serving me persisted in trying to draw my attention to one of the financial products the bank was promoting (my guess is she gets a commission if I buy the financial product or agree to be referred to a relationship manager). The teller, however, was unprepared and porbably stunned by my response. Acting and sounding very pathetic, I said :)

"Excuse me, do you know why I am closing this account? I am broke, and I have mouths to feed. If I have money to invest, do you think I will need to close this account? I am desperate, do you have money to spare?"

.

Satyajit Das, author of a book entitled "Traders Guns & Money" recounted a more dramatic & appaling incident that happened in a Singapore bank (extracted from the Business Times):

'One day, I went to a bank in Singapore to change some travellers' cheques. The woman in front of me in the queue had a maturing deposit that she wanted to reinvest. The Singapore dollar rate was a tiny 0.5%. The woman was not happy. The bank employee suggested alternatives. ' 'You could do a special structured deposit that pays 4%,' he suggested helpfully.

My interest was aroused. The deposit would entail the woman investing S$; she would earn 4% at the end of six months; the bank would return Singapore dollars, US dollars, British pound or Australian dollars to the investor. The amounts in each currency were set today and the bank would choose which currency it would pay back to the investor.

'The deposit was not really a deposit, it was a S$ deposit combined with a complex currency option. The bank would pay back the weakest of the four currencies agreed. The amounts in each currency were based on the exchange rate at the time the investor made the deposit. The best case was that the investor received the same as the original deposit in S$ and the worst case was that she received an amount in foreign currency. The foreign currency received, when converted into S$ at the actual interest rate on the day, would be less than the original amount deposited.

'The high return was coming from the premium that the investor received for selling the option, which was an exotic - a 'four colour rainbow' or 'worst of four' option. For the investor, the pot of gold at the end of the rainbow was dependent upon the Singapore dollar's performance against the other currencies. I didn't like her chances.

'The woman was interested in the product, the juicy high yield was enticing. The salesperson moved in for the kill with a feint worthy of a skilled matador: 'Do you have kids?' The woman nodded, saying she had a son. 'You want him to have an education overseas, I am sure?' Again the woman nodded. 'The product is perfect for you. You can use the money to pay for your son's tuition fees. You don't know whether you will need dollars, pounds, Australian dollars. Your son could go to school in the States, England or Australia. You just don't know. And the extra interest will help.' Again the woman nodded. She was giving off closing signals. It was a done deal.'

Source: Genevieve Chua "Derivatives made readable" Business Times (27 Sep 2008) & Michelle Tay "Sale of Structured Products - Call for More Transparency", Straits Times (4 Oct 2008).