Tan Kin Lian’s blog has a contribution that further explains the whole Minibond situation:
The name “Minibonds” itself is a misleading word for investors. Whatever money you have invested in this “Minibonds” are not invested in bonds of the six reference banks or bonds issued by Lehman Brothers. This is how it works.
Lehman Brothers may or may not buy any bonds from the six reference banks but it is just using these banks as “reference entities”, some sort as a “bet” with Minibonds holders. There are basically 5 entities involved in the Minibonds arrangement.
1) Lehman Brothers as the credit risk swap partner.
2)Lehman Brothers has created an empty shell company Minibond Ltd which will issue the Minibonds to investors.
4) The money taken from investors will be invested in a basket of AA financial products from 150 companies which includes CDOs which is basically collateral debts obligations, some of them are related to SubPrime debts.
5) The reference entities which have nothing to do with investors’ investment other than being a betting reference: i.e. if any one of them failed, it would be a credit event that make investors lose money to Lehman Brothers.
For simplicity to understand the whole arrangement, just take it that Lehman Brothers has bought some bonds from these six reference entities and it needs somebody to insure its risk of exposure to these banks. It did not insure its risks from insurance companies like AIG but instead, via this Minibonds arrangement, bought insurance from investors like you.
Through the Credit Risk Swap, you as an investor has agreed to sell insurance to Lehman Brothers with regards to the reference entities. In order to become an insurance agents of Lehman Brothers, you will need to come up with money as collateral. This money is collected from you via the financial institutions that you bought the Minibonds and given to Minibond Ltd to invest in a basket of CDOs issued by 150 companies.