Feb 10, 2009

The Saga of the Structured Notes - What Next for the Struggling Investors (Part 3)

As my regular readers know, I am a lawyer. I specialise in derivatives. I work in an investment bank. I also have some CMFAS qualifications (which are compulsory for all personal financial advisors in Singapore). In addition I have worked as a structurer, creating structured products and executing structured transactions for sophisticated clients.

My work scope is, and has been, very international. I regularly deal, and have dealt with, clients and assets across many different countries. These include London, New York, Hong Kong, Singapore, Dubai, Seoul, Bangkok, Manila and Taipei.

Thus I think it is fair to say that I know structured products much, much better than the average layman.

Now, let me tell you something else. Personally, I have never invested in any structured product. Not even once.

Don't get the wrong impression. Structured products are not all bad. In fact, structured products can be very useful. They are specially tailored and designed to meet the needs of powerful, complex, sophisticated clients. Such clients could be hedge funds, other banks or even sovereign wealth funds such as GIC or Dubai World.

Now, why have I personally never invested in any structured product?

Because I am not a hedge fund. I am not a bank. I am not a sovereign wealth fund. I am not even an MNC. My needs are much, much simpler. I am merely an ordinary citizen, living in a HDB flat, married with two kids. In other words, I am very much like most of you.

Of course I do need a good personal financial plan (and so do you). I need a strategy to ensure that I can meet my daily expenses; to protect my family against any possible misfortunes such as illness; and to achieve long-term goals like sending my children to university and saving enough for my retirement.

However, that plan does not require any fancy structured products. Instead a sound combination of traditional, much simpler products will do fine. For example, I have a savings account; some fixed deposits; medical and life insurance; a CPF and SRS account; and some unit trusts.

And that's pretty much about it.

I do not need an illiquid rated first-to-default credit-linked note issued by a bankruptcy-remote Cayman Islands special purpose vehicle; linked to a basket of reference entities and their reference obligations; and secured by a portfolio of underlying assets whose cash flows have been modified by cross-currency and interest rate swaps with a swap counterparty called Lehman Brothers.

Mind you, I know exactly what the above means. I know exactly how it works. I could easily give a talk or presentation to explain such structures. (And actually, I have).

However, I personally do not need such an instrument. I simply have no need for it. For the purposes of my personal financial plan, it is completely unnecessary to own a Lehman Minibond, or anything like it.

And frankly, I cannot imagine why such a complicated thing would be appropriate, suitable or advisable for retail investors.

This is not merely my own opinion. Simply go to any bookstore, and look at books on personal financial planning for the individual. You will find that the books discuss cash, bonds, equities, insurance, funds, REITS. But you will find that the books do not discuss structured products at all. Certainly not credit-linked notes. Why? Because, as I said, such products are completely unnecessary for the man in the street.

In Part 4, I will discuss legal issues relating to the sale of unsuitable financial products to the unsuspecting general public.


bbqchickenwings said...

So why do banks sell these products to the man on the street?

Greed greed greed

Anonymous said...

If I read you correctly, you will next be asking why in the world were structured products allowed to be mass marketed? The reason is that the proper authority in the financial sector forgot its regulatory responsibility and focused too much on its developmental role. As early as 1996 when the government decided that one path of growth was to build up Singapore as a financial sector, the need to separate the regulatory function at MAS from its developmental role was raised by well meaning practictioners. In fact it was suggested that the developmental role should be undertaken by the EDB which had a Seervices unit that was promoting medical services ( and later, educational services ). But the wise and well paid politicians and administrators thought otherwise. MAS created Financial Sector Development unit instead and staffed it with secondees from EDB, one of whom at least was later absorbed as a permanent MAS employee. Well with KPIs to meet and bereft of new innovative products which Singapore could pioneer after the Asian Currency thingy of yesteryear, structured products, hedge funds, and REITs were all promoted aggressively. All so as to best its main regional rival Hong Kong. So it actually all began with a simple error of judgment.

Anonymous said...

I read somewhere in Asia only HK and Spore are selling these financial products of mass destruction. I stand corrected.

Spore's economy being planned top-down I think it is very obvious where the problem starts.

Mr Wang Says So said...

I had mentioned Asian jurisdictions like Seoul, Bangkok, Manila etc. Perhaps that gave rise to a mistaken impression/ I should clarify that in the course of my work, I do not deal with retail investors at all. The clients I get involved with are always financial institutions, large MNCs and so on.

Also I do not think that structured products for retail investors are common in Asia, but certainly it is in HK and Singapore that they would be least uncommon.

Anonymous said...

Thanks for explaining Mr Wang. I am not bright. I always feel so stupid when personal relationship manager explains this&that products. What i don't understand, i don't touch-which is pretty much everything. I get THAT tone of voice so i ask manager not to call...which explains why i got transferred from one manager to another more junior one regularly. I don't understand how to make my money work for me-i just want my money (hopefully) to be there. Simple Simon.

Anonymous said...

Banks want to make faster and bigger profits. Traditional deposit taking and giving loans is much less attractive compared to selling structured products. Of course to make it big, you have to go for volume, ie selling to as many retail investors as possible. Hence the need for many "frontline troops" - relationship managers.

When something goes wrong, you get a mass financial tragedy, like what happened last September.

And of course MAS is partly responsible for allowing such products to be sold to common folks. Not a single person there has the thinking of Mr Wang to prevent this.

So folks learn from the above and Mr Wang's blog.

Jon said...

Wang San,

Suffering has turning into Struggling.

The Saga of the Structured Notes - What Next for the Suffering Investors? (Part 1)

The Saga of the Structured Notes - What Next for the Suffering Investors? (Part 2)

The Saga of the Structured Notes - What Next for the Struggling Investors (Part 3)

Anonymous said...

Off topic but I am really depressed that the fraudsters at JP Morgan are not locked up with keys thrown away. ditto the crooks at SEC and the clueless clowns at MAS.

Sorry, I have not seen any useful structured products but I have seen many innocents colleagues who have lost their jobs because some overpaid idiots in New York thought they understood the products.

Anonymous said...

Your advice comes too late. If you had told people about structured products earlier in your blog, and mentioned that "DBS High Notes", etc are all strcutured products, you could have saved lots of people here
the grief.

Now, we know that many of these structured products were marketed "just like an FD". Does it mean that there was a misselling here?

Anonymous said...

Dear Mr. Wang,

Can you do us a favour by deciphering Temasek's reported losses?

Does Lim Hwee Hua's justification (as reported in the Straits Times) make sense?

Thank you.

Anonymous said...


with Obama already looking "business as usual" with his appointment of Geithner who, as expected, is making the crisis worse ...

In not too long future, we may even look back and envy these struggling investors who at least may get something back.

Anonymous said...

Although Mr Wang's advice came late, there are other people like Mr Tan KL and Dr Money who advise people against buying structured products.

Anonymous said...

Mr Wang

watch this video clip:


Anonymous said...

'with Obama already looking "business as usual" with his appointment of Geithner who, as expected, is making the crisis worse ...'

If you want to get over the crisis, the only way is stop the bailouts. Let the correction begin, let debts, along with investments tied to these debts, be wiped out. Let the market sort it out. But this will bring a lot of pain, at least in the short term.

LHL and the PAP govt loves to say this, "short term pain is better than long term pain". Now when it comes time to walk the talk, look what they are doing. They rather bail out businesses and corporations and lessen the pain for corporate citizens.

Anonymous said...


This clip was shown on Taiwan's TVBS. I don't think the 148th media will show it. LOL

Anonymous said...

Mr Wang,

May I ask your opinion on one additional point?

Even with an objective 3rd party assessment of my risk profile as "Moderately Aggresive", I never realised that the bank would reflect this profile in the investments it would recommend.

I have a portfolio of STOCKS and OPTIONS. To balance this, my investment portfolio with the bank was intended to be conservative, which was exactly what I had (mis)understood the product (together with my savings account)to be.

With no evidence to back my version of how the product had been presented to me, I can leave aside the fact that I had been given the impression that this was a safe product. However, even with an unbiased instrument, is it at all fair for the bank to apply the instrument without explaining clearly what it meant?

Anonymous said...

Can someone argue that even if he is classified as moderately aggressive, this instrument was meant to the ‘safe and relatively lower return’ part of his investment portfolio?

Anonymous said...

I have a personal question. What is your opinion on setting aside a fixed monthly amount into unit trust over the next 3 years in the current market?

Kay said...

I think everyone needs to know that banks are not your friends. Banks are only a place for you to keep your money and carry out transactions which involves money.

Banks, like any other companies report to their shareholders and they seek to maximize their profits. Thus when it comes to investment, they would be more concerned with how much profit they can make rather than how much profit you can make. Everyone will be better off by putting their cash in ETFs, unit trusts or government bonds.

Anonymous said...

February 11, 2009 2:19 PM:

common sense would say that you're right.

as for whether the laws n regulations allow for that line of argument, that's another thing.

Anonymous said...

hi mr wang,

im just a man (or woman in this case) on the street and would have no clue about all the financial gobbledygook so really a big thank you for making it plain and understandable. More than that, thanks for giving an unbiased opinion!

Anonymous said...

I agree with everything Mr Wang has written.

However, there is little mention of personal responsibility. If a financial product is so complicated that even very experienced investors struggle to understand how it works, the vast majority of people would likely be unable to understand readily how it works. It doesn't take much intelligence to know that it is not a good idea to invest one's money in something one does not understand. But it does take some degree of common sense.

In some cases where verbal assurances of safety were given, I would imagine that busy clients who relied on this verbal advice and bypassed the prospectus would have some case to argue. But if the RM accurately explained the risks, or was silent, the prospectus itself would scream loud and clear at first glance that these products are not suitable for individuals.

Personally, I took a look at a few structured products and, being unable to understand how they made money and recognising that I was unable to even start to calculate the probability of the events happening that would determine my expected return, I threw them in the dustbin.

Now, I have made plenty of errors of judgement recently in calculating risks of investing in common listed companies and trusts, but these relate more to the economic assumptions rather than the basic rules of the game.

When one is simply unable to understand the basic rules of the game and how they operate, it seems a no-brainer that the product is unsuitable.

If a judge hearing a case thinks the same as the above, he/she may well rule that even though a product was unsuitable for retail investors, investors could easily have identified it as unsuitable and avoided it.

Anonymous said...


you also have to regconise that there is something called social responsibility. I want don't profit driven companies with zero ethics. I might be idealistic, but if you don't demand for a higher standard of conduct from them you are gonna keep getting crap dished to unsuspecting customers. They are not my friends but it doesn't mean they can ignore their responsibility to the consumers.

Anonymous said...

Why is this product sold to retail investors? This is the billion dollar question. The answer is staring at us all these years but Singaporeans did not see it, much less understand it.
The answer is simply incompetence at the regulatory level. In other words, we have got pseudo talent in our midst. We pay top dollars for the scholars in MAS and relied on our govt for appointing them, thinking that the criteria for appointment is stringent and strict. So real talents like Mr Wang and many others were sidelined, and instead pen pushing, more good years mouthing pseudo talents have been appointed. These pseudo talents do not understand such sophisticated Structured products and therefore honestly and mistakenly let it in. Of course, they will never admit it, much like they will never admit that Ho Ching lost the billions and kept insisting that she is a talent, and gloat on her firm understanding and grasp of Singapore when what is needed is a firm understanding and grasp of the world.
Many have tried to raise the understanding but were shot down whenever their views contradict with the establishment. This is the sure road to ruin and it is beginning to happen.
More good years.

Anonymous said...


They have performed better than some other indexes and they do not have to sell in panic in a market downturn, and are in fact in an advantageous position to invest in good quality assets at prices that are attractive from a long-term perspective during a downturn.

Good time to invest now. Now definitely downturn. No panic. Take your pick.

Anonymous said...

"If a judge hearing a case thinks the same as the above, he/she may well rule that even though a product was unsuitable for retail investors, investors could easily have identified it as unsuitable and avoided it."

Could easily have identified ? Does it also apply to our SWF investments. Or those Madoff investments.

I wonder any judges / some MPs here could have been affected by these investments also.

Onlooker said...

Waiting for the 4th part :)