The collapse of Lehman Brothers and the subsequent fallout of Lehman-linked products have caused quite a stir in Singapore. Investors who purchased Lehman-linked products are now crying ‘foul’ and are demanding compensation.
But I can’t help but wonder if these investors are simply victims of their own ignorance.
The prospectus is readily available to these investors and most (if not all) agree that there was some risk, however small, associated with the purchasing of such financial products. So why are they crying foul, despite clear knowledge of the risk?
The answer is simple; they did not perform sufficient research and found a sense of security in their ignorance.
There’s an old saying that goes, “What you don’t know can’t hurt you”. These investors took this adage to heart and now they’re suffering for it.
I learnt a lot about financial markets from my father, a former accountant who was senior management in many of the banks he worked in. As he eased into retirement, he wound up teaching at SIM. He trained many financial planners and told me to be wary of them. He said that not all financial planners know what they’re selling. Clearly, he was right.
Financial planners aren’t Nobel Prize winning economists. There’s a reason why they’re in the business of selling; they’re usually to inept to perform at a higher management position in the competitive financial industry. Their job is to educate consumers about their products to make the sales where possible.
Why would you trust someone like that?
If you are a novice in the realm of finance, you should conduct your own research and educate yourself with information from credible sources that have no vested interest in misleading you. That would be the least you could, especially if you are investing several thousand dollars, or in some cases your entire life savings.
But wait a minute NinjaMasterX, I did my research and I still got burnt! Doesn’t that reserve me the right to demand my money back?
Well, from a legal standpoint, no.
When you buy a bond, you are essentially financing a loan. You ‘buy’ someone else’s debt. By ‘loaning’ money through a bond, you assume the risk that the person will be unable to pay you back. That’s why all financial products have disclaimers and that’s why all of them provide a prospectus.
When the subprime mortgage crisis began to surface, these investors should have reexamined the nature of their products. The subprime mortgage crisis was created when banks provided home-loans to consumers who were at a high risk of defaulting. These debts were sold as bonds.
If I lend someone money, and if I happen to learn that the borrower may potentially face problems paying me back, I’d investigate immediately.
Self-proclaimed ‘educated’ investors who claim to have understood the nature of the products are clearly contradicting themselves if they were unaware of their product’s links to high-risk mortgage loans.
It is arguable that the product’s AAA rating was accurate at the time it was rated, and it probably was. Unfortunately, corporate misgovernance betrayed the accuracy of that rating. In that case, burnt investors should attribute their problems to the executive board of Lehman Brothers.
It is unfair to blame DBS for the DBS High Notes 5 product or Hong Leong Finance for its Lehman Minibond programme. These companies were equally unaware of Lehman Brothers’ insolvency.
Financial products carry risks. It is illogical to assume that a hassle-free investment that provides a 5-7% return per annum is risk-free.
“Low-risk” is not the same as “no-risk”. If a borrower has a 3% chance of defaulting, it is mathematically improbable that it would happen, but you could still hit that 3%. It seems like casualties of Lehman Brothers got on the wrong side of the equation and are now feeling sour. Apparently, they weren’t so ready to assume risk after all.
