WHEN Hank Paulson, America’s treasury secretary, let Lehman Brothers fail in September, he surely did not consider the damage the investment bank’s collapse would inflict on elderly savers a continent away. In Hong Kong, Singapore and Taiwan, thousands of people have taken to the streets to protest against the implosion of a series of retail securities which resulted from the bankruptcy.
The backlash begin
Banks and regulators were taken off guard and are only now totting up the damage. Singaporean authorities estimate that 11,000 residents held duff securities with a face value in excess of S$530m ($347m). In Hong Kong, 43,700 residents held HK$20.1 billion-worth ($2.6 billion). In Taiwan, 51,000 people had tainted holdings of NT$40 billion ($1.2 billion). Some Taiwanese are expected to stage a mass protest on November 29th.
Although many different securities were affected, they shared a common trait: fiendish complexity. One firm would arrange the structure and handle dividend payments. This was often Lehman, which was why they were commonly called “Lehman minibonds” (even though they were not bonds and were never simply Lehman obligations). Below the arranger were half a dozen or so “reference” banks which held collateralised-debt obligations and sometimes equity, issued by as many as 100-150 institutions.
From 2006 onwards, banks and brokers sold these now troubled securities to individuals desperate to earn more than the 1% or less on guaranteed deposits. Buyers were betting on modest returns, typically 5-6%, low enough perhaps for them not to have been too suspicious about the instruments’ complexity.
Lehman’s bankruptcy filing undermined its ability to pass along dividends even when the underlying structures were sound, which triggered the first defaults. Securities arranged by Merrill Lynch and DBS Bank in Singapore then collapsed because Lehman credit was an ingredient in their composition.
Inevitably, lawsuits will be filed. Because most securities were sold with lengthy prospectuses that made clear the lack of principal protection, the cases are likely to rest on the premise that the investments were unsuitable for the customers, or not understood by the salespeople.
Rather than waiting for messy court battles, Singapore has taken the novel step of asking firms to reimburse “vulnerable customers”, meaning those who are old or illiterate or who lost a lot. Authorities plan to investigate and say they will take into account how generously institutions treat their customers in the aftermath.
Behind the scenes, Singaporean authorities are also attempting to find a way to reconfigure the securities to capture the value of the underlying collateral. This kind of twin-track approach may hold appeal for governments around the region. Wealthy investors across Asia are sitting on vast losses from lots of other odd financial products created during the boom. The authorities would hate them to take to the streets, too.