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FAQ like list from Tan Kin Lian on Minibond issue

Think there were alot of arguments against penalizing investors mislead by distrbutors on the risk level of the Lehman Minibond, Jubilee Notes. To an extent, I agree that the names of these products is misleading however my opinion on the last item listed below at Mr Tan Kin Lian’s Blog is that 5.1% is justifiable if he is using OCBC preference shares as comparison. If tomorrow OCBC collapse, preference share owners will be claimable for any liquidation of assets after the bond holders, before the actual equity holders. But the general idea is that OCBC CAN collapse, just like Lehman does. The probability of a Lehman collapsing is 6 choose 1 times some other metrics to determine the financial state of the 6 institutions. compare that to the probability of OCBC collapsing is 1 choose 1 times similar metrics. I think if bankruptcy is what we are looking at here, OCBC might be compensating less!

I would like to response to some misconceptions and unfair criticisms to the minibond holders from the general public (and probably including some of our leaders). They are :

1) When Lehman brothers did not fail, these minibond holders collected their quarterly payout and kept quiet. Now they got burned, they want MAS to bail them out ?

We did not asked MAS to bail them out, what we are asking is: MAS please carry out your duty , i.e. to investigate into any mis-selling and mis-representations.

2) Since you have make a wrong decision in investment , you have to take responsibility and accept the consequences.

Many of us were misled into believing that the product we bought is a bond issued by the six leading banks (or the investment is to buy into bond issued by the six banks) namely, DBS, Citibank, Merrill lynch. Goldman Sachs, HSBC, and Standard Chartered bank. Now then we discovered that the bond is actually not issued by the six banks and worse it is not a bond, instead, it is a very complex product which even the sales people from the Financial institutions are unable to explain clearly.

3) The risks are explained in the prospectus in bold print that you can lose everything. Therefore minibond holders cannot claim that they do not know the risks

We understand that the principal amount is not guaranteed. But we are misled into believing that the bond is issued by the six leading banks(or the investment is to buy into bond issued by the six banks) and therefore if one of the six bank fail, the maximum loss is only 1/6 (16.7%) of the principal amount. We will lose everything only when all the six leading banks go bankrupt. Since Lehman brothers is not one of the six banks, we should not suffer any loss.

4) it is greed that drive them to invest in minibond.

Many of us bought the bond during last year when the market is good, if it is greed, then we should invested in stocks, because the return is easily 20% to 30% within weeks. But instead we chose to part our money in minibond for five full years just to earn a total return of 25.5% ( 5 x 5.1%).

5) high return high risk, since you get 5.1%, the risk should be high.

Comparing with the OCBC 4.2% and 4.5% preference shares available from the stock market, which we can sell the shares anytime if we need cash, the interest offered by the bond is not very attractive because we have to part the money for 5 years just for 5.1% interest. But the bond is issued by the six leading banks, the risk should be much lower than OCBC preference shares(six bank against one).

Thank you.


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Saturday 1st of November 2008

hi dnhh, thanks for evaluating for me. Thats why i say its times a certain metric about the financial situation of the firm going forward. hell if its so easy, then calculating CDS would be much simplier.


Saturday 1st of November 2008

And on the greed part. It is greed that lead them to buy minibond as other deposit/bond yield type investment is not available with the same kind of return. This cannot be compare with buying equities or commondities.


Saturday 1st of November 2008


On OCBC preference shares and Minibond(if it is really a bond) If this is what Mr Tan with years of experiences in finance industry really think, then it is a sad case.

The probability of OCBC collapsing is not 1 or 1/6 for any one bank in the other case. If so then it is like playing russia roulette. And the yields will be in double digit or even 100% for OCBC.

Is the 5.1% being reasonable priced? Let not forget that these are priced before current crisis. 1st of all, just by comparing OCBC preference shares with minibond is not justifiable without further information. In fact, if this minibond is from OCBC, I would expect it to yield lower than preference shares, that is how the relationship of these things work. So let say OCBC preference shares are being price "correctly", the yield itself is already saying minibond is more risky.

Excluding this crisis, bonds from any six leading well run banks should yield lower than OCBC preference shares or at around the same yield if OCBC has better capital even it is smaller.

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