Distributors waiting for unwinding instructions from bankrupt US bank
(SINGAPORE) Events that have unfolded in the United States over the past few days could hurt some investors here. Those who had bought Minibond notes worth almost $500 million, arranged by Lehman Brothers over the last two years, were left in the dark yesterday as to how much they might recover as there is no news yet from the bankrupt US bank.
Unlike what their name suggests, Minibonds are not bonds but a derivative product that offers investors little protection.
Meanwhile, there may be better news for those that invested in the All Weather Booster Notes arranged by Merrill Lynch that were sold earlier this month, but have not been issued yet. BT understands that the Monetary Authority of Singapore (MAS) might look at giving these investors an option to withdraw from the deal. Merrill itself has just been sold to Bank of America.
Investors who bought Minibonds are more likely to get burnt. A fair number could be retail investors given that the minimum amount sold was $5,000. The Minibond notes were sold over the last two years under series 2 to 10, the latest of which was just last month.
One retail investor who sunk $5,000 into Minibond series 3 said: ‘I should have bought a watch.’ Another who had bought $2 million worth was more sanguine, saying that he will ‘move on’.
According to one broker, the earlier Minibond series was quite popular because they offered as much as 5 per cent dividend, and were invested mainly in high yielding collateralised debt obligations (CDOs), which only got a bad name after the US sub-prime mortgage crisis broke in the middle of 2007.
Distributors of Minibonds which include local and foreign banks, brokerages and Hong Leong Finance were getting anxious calls from clients yesterday but could not shed much light as they had yet to hear from Lehman.
Said a CIMB-GK Securities executive: ‘I’m also waiting for news - I didn’t invest but some of my friends invested in it.’
Carol Fong, chief executive of CIMB-GK Securities, said that the firm was in touch with Lehman Brothers in Hong Kong to assist clients with their enquiries on the Minibonds.
‘In response to enquiries from customers, OCBC Securities has advised them to wait for further news from Lehman Brothers on how the investment bank will unwind the transactions and pay noteholders the credit event redemption amount,’ said Koh Ching Ching, OCBC Bank spokeswoman.
‘We are currently taking legal advice and will keep our clients updated,’ said Ajay Mathur, RBS, head of retail banking.
A United Overseas Bank spokeswoman said that the bank is taking a proactive approach in updating clients on the latest developments. ‘I’ve been explaining the whole day to all walks of life,’ said Daniel Seah, UOB Kay Hian senior officer. He said that there was value in the underlying assets which were invested by Minibond, a company set up to issue the notes.
Minibond has to sell these assets. After deducting the costs involved in the termination, what is left will be paid back to investors, he said. ‘The main thing is, how much investors can get back depends on the open market value of the assets.’
The problem lies in the value of the assets, such as CDOs which have become tainted by negative publicity, although not all are associated with sub-prime mortgages.
The latest Minibond series 9 and 10 which were sold last month focused on safer assets such as bonds, said Mr Seah. The underlying assets in series 9 and 10 consist of senior secured and unsecured securities issued or guaranteed by major US and European banks, according to the document lodged with MAS.
The document also said that Minibond has issued seven series of notes under the programme, with the outstanding amount at about $482 million.
As for the All Weather Booster Notes arranged by Merrill Lynch, Mr Seah said that he understands that investors could be offered a choice of backing out if they want to. Distributors may then refund their clients.
The sale of the All Weather Booster Notes closed on Sept 12 and the money collected from investors is currently held by the distributors - ABN Amro Bank, AmFraser Securities, CIMB GK, Citibank, DBS Vickers, DMG & Partners, OCBC Securities, Standard Chartered Bank and UOB Kay Hian. The notes will only be issued on Sept 20.
By Catherine Belton and Charles Clover in Moscow, Rachel Morarjee in London and Reuters September 17 2008 10:03
Russia’s two main bourses, RTS and MICEX, said on Wednesday they were suspending trade until further notice from the state’s main market regulator as shares continued to tumble one day after their steepest decline in more than a decade.
The dollar-denominated RTS was down 6.4 percent and the rouble denominated MICEX was down 3.1 per cent when the suspension was enforced with the two main state-controlled banks, Sberbank and VTB leading the slide.
Earlier on Wednesday a high-level government source said the government would unveil measures aimed at stabilising the market situation in the next two to three days.
“Certain signs of a crisis are seen on the market but they are mostly emotional,” the source who asked not to be named told the Reuters news agency.
“The measures which were agreed yesterday at a meeting chaired by First Deputy Prime Minister Igor Shuvalov will be made public within two or three days,” he added.
Russian shares suffered their steepest one-day fall in more than a decade on Tuesday, losing up to 20 per cent, as a sharp slide in oil prices and difficult money market conditions triggered a rush to sell.
The heads of the Russian central bank, the finance ministry and the financial market regulator met on Tuesday night for an emergency discussion on ways to halt the crisis.
Earlier, trading had been suspended on both the Micex and RTS stock exchanges as investors ignored assurances by Russian officials and a cycle of distrust set in amid liquidity fears.
Margin calls forced domestic traders to liquidate positions and brokers pulled credit lines. At least one Moscow bank failed to meet payments.
The rouble-denominated Micex Index closed 17.75 per cent down, the sharpest one-day drop since the August 1998 financial crisis, while the dollar-denominated RTS index closed down 11.47 per cent, its lowest lvel since January 2006.
Interbank money market rates climbed to 11 per cent, their highest since a mini-banking crisis in summer 2004.
Chris Weafer, chief strategist at Uralsib investment bank: “We’re in completely uncharted territory where the prevailing emotion is of fear and numbnes. No one knows where this could stop”.
Alexei Kudrin, finance minister, insisted that the financial system was not in a systemic crisis but the central bank injected a record $14.16bn in one-day funds into the money market.
The finance ministry also placed an additional R150bn ($5.8bn) in one-month deposits into the banking system. Konstantin Korishchenko, central bank deputy, told Russian news agencies that the bank and the finance ministry could provide a total of $117.6bn in liquidity to the banking sector.
But market players said banks were ceasing to lend to second and third-tier companies and brokers were pulling credit lines. KIT Finance, big Moscow investment house confirmed rumours that it had been unable to make payment on a series of short-term loans.
It said: “In connection with the fact that a series of our clients did not meet their obligations to our bank, we have not met our obligations to our counterparties.
“We recognise our responsibility to our counter-parties and to the market and we are working intensively to resolve the situation.”
Andrei Sharonov, managing director of Troika Dialog, a Moscow investment bank, and a former deputy economic minister, said: “This is a vicious circle,” said,.
“It is a situation of total mistrust. The liquidity crisis is being caused by a crisis of confidence in which people are frightened to borrow and frightened to lend.”
Shares in Russia’s biggest state-controlled banks led the slide with Sberbank, the state-controlled savings bank, closing 21.72 per cent down and VTB losing 29.26 per cent. The bank was suffered on investor fears about its securities portfolio, which makes up about 10 per cent of its assets.
The collapse of US insurance giant AIG and its US$85 billion takeover by the US government on Tuesday takes the US financial crisis right to the heart of China's development as a capitalist country.
AIG, the world's sixth-largest company by assets and biggest insurer, according to the Forbes Global 2000 list for 2007, is one of the few US institutions to be founded in China, its roots dating from 1919 when Cornelius Vander Starr, a veteran of World War I, founded a small insurance company in Shanghai called American Asiatic Underwriters, later to become AIG.
More famously, Starr's successor, Maurice R Greenberg, built relations with China's leadership from 1975, his first visit to the country predating by several years the revolutionary moves by Deng Xiaoping to open up China to Western influences.
In this, Greenberg proved himself a master of developing guanxi, a term summarized as "connections" and now recognized as holding the key to successful development of business in China.
According to Benjamin A Shobert, reviewing Robert Buderi and Gregory T Huang's book of that name, "guanxi is commonly perceived as partnering and understood to focus the attention of Westerners on the great importance that the Chinese put on relationships. To most Westerners guanxi emphasizes personal relationships in contrast to the contractual, non-relational business practices common in America.
"While a portion of the word's meaning can simply be seen as stressing relationships, the authors emphasize that a better understanding of the word is to emphasize four things: trust, favor, dependence and adaptation - the last what the authors call 'patience and cultivation'."
Greenberg's patience and cultivation of relations with China's leaders saw him play a key role in building links between the US and China, while his company had a front-runner's view as it and China metamorphosed into leading players in the global business world.
Starr was the initial pathbreaker. When he set up shop in Shanghai, there were many other Westerners selling insurance in the city, then as now the country's financial hub. But these potential rivals almost exclusively concentrated their efforts on selling to other Westerners. Starr realized that the Chinese people themselves represented a vast and underserved market for insurance, with relatively low risks. This insight would enable him to become one of the wealthiest men in the world.
Within 10 years, Starr had established offices across China, Hong Kong, the Philippines, Indochina, Jakarta and Kuala Lumpur. In 1926, he opened his first office in the United States. The growth of his company was temporarily disrupted by the Chinese civil war and the general turmoil in East Asia. In 1939, Starr moved the headquarters of his corporate empire to the Empire State - New York. From there, his company and fortune grew many fold.
In 1962, Starr appointed Greenberg to head AIG's then failing North American operations. In a remarkable display of business prowess, Greenberg turned the unit around, a feat that encouraged Starr to name him his successor before passing away in 1968.
Starr bequeathed all his wealth to the C V Starr Foundation, one of the largest foundations in the United States, with over $3 billion in assets. Greenberg became the chairman of this foundation while also assuming the reins at AIG. Under his leadership, the company prospered while he himself became one of the kingpins of American foreign policy.
In 1977, he became a member of the Council of Foreign Relations, arguably America's most influential think-tank, and over the next three decades he would hold numerous leadership positions in the council, culminating in 1997 with the founding of the Greenberg Chair.
Today, the Greenberg Chair "is the senior person directly responsible for the substantive content and management" of the think-tank. Greenberg has also been a member of the board of directors of the New York Stock Exchange; a former chairman, deputy chairman and director of the Federal Reserve Bank of New York; a member of the US-China Business Council; the chairman of the Asia Society; and a member of the Advisory Committee for Trade Policy and Negotiations to the President of the United States.
With all of these roles, plus his control over the resources of the Starr Foundation and the American International Group, Greenberg's power to shape America's foreign policy was rivaled only by Citizen Kane.
Greenberg's foreign policy views were heavily influenced by two factors. One was his experience in World War II of the liberation of the Nazi concentration camp at Dachau. The other was the legacy of Starr's love for China. This latter factor would ultimately play an enormous role in shaping America's policy toward China for more than a quarter of a century.
In all of his actions and with all of his influence, Greenberg exercised a sanguine desire to foster reconciliation and cooperation between the United States and the People's Republic of China. The impact of this desire can be seen in the fingerprint that Greenberg has left on academic and policy institutions around the United States.
At his discretion, the Starr Foundation has funded numerous fellowships with the Asian Cultural Council, donated $300,000 to Columbia University's East Asian Library and considerably more to Berkeley's C V Starr East Asian Library. Most recently, Greenberg and the Starr Foundation each donated $25 million to Yale University to create the Maurice R Greenberg Yale-China Initiative.
Greenberg's lobbying efforts were a driving factor behind America's decision to support China's admission to the World Trade Organization, which it officially joined in November 2001. Undoubtedly, a fair amount of the credit for the creation of an American policy environment that is favorable to China is due to Greenberg and the resources that were generated by AIG.
AIG's own development in China took various, often ground-breaking, forms. China America Insurance Company was formed in 1980 as a 50-50 joint venture between AIG companies and the People's Insurance Company of China (PICC), the first joint venture between a foreign insurance organization and PICC. Personal ties with future leaders were also forged. In 1990, AIG financed and chaired a financial services conference in Shanghai to assist then city mayor and later country premier Zhu Rongji in introducing the international financial community to investment opportunities in Shanghai.
Two years later, AIG unit American International Insurance (AIA) established a branch office in Shanghai, to become the first foreign-owned life and non-life insurance business to receive a license from the People's Bank of China. In 1995, AIG companies won licenses to extend operations to Guangzhou, the key city in the country's efforts to open up to the outside world of commerce, and a year later it secured a lease allowing it to return in 1998 to the Shanghai Bund, home of C V Starr's original Shanghai insurance companies.
In 2003, by which time AIG's presence in the country extended to several provinces, the insurer acquired a 9.9% stake in PICC Property and Casualty (PICC P&C) when the Chinese company listed in Hong Kong. In 2005, as the Chinese government continued to ease its grip on the financial sector, AIG Private Bank became the first foreign private bank to receive approval to open a representative office in Shanghai.
One immediate effect of AIG's collapse could be on PICC P&C's stock price, which would be at risk if AIG liquidated its stake, Citigroup analyst Bob Leung said in a research note on Tuesday.
Chinese insurers also face a greater counter-party risk from the collapse of AIG than from Lehman Brothers, the other US financial giant that crumpled in the past few days. Lehman, which has filed for bankruptcy has significant exposure in Asia. "Given the very low life insurance accession rate in Asia, "if AIG loses its A- rating or its situation worsens significantly, we expect the financial impact to affect mainly P&C insurers," Leung wrote.
S&P lowered AIG's long-term counterparty rating to 'A-' on Monday.
China's insurance regulator declared that AIG businesses in the country were sound, echoing statements from the rest of the region. This is however a big concern going forward, given the large market share that AIG commands in many Asian markets, and the sheer volume of domestic securities that it holds across the region.
Other insurers in China meanwhile may gain from AIG's loss. "China Life, with a strong balance sheet and limited non-yuan asset exposure (less than US$3 billion and mainly in H-stock [Hong Kong listed shares] and cash) has the strongest balance sheet of all regional insurers and is likely to benefit from a 'flight to quality' perspective," Leung wrote.
The sudden decline of AIG may lead to a reduced influence of the company in international affairs, and a cut in the amount of resources that are lavished on America's foreign policy establishment for the purpose of encouraging China-friendly policy.
As it is, Greenberg's pathfinding and influential role in China has already been superceded to a large extent by the huge influx of other Western business leaders, notable among them Henry Paulson, who as chairman and chief executive of Goldman Sachs spent much time and and effort building his own relations with the present Chinese leadership.
Paulson's appointment as US Treasury Secretary in 2006 came at a time of simmering tensions between Washington and Beijing over China's reluctance to strengthen its currency and rein in the growing trade surplus it enjoyed with the US. Demands for faster appreciation of the yen continue, but their tenor has become less strident since Paulson took up his government post, with the focus on relations changing through the Strategic Economic Dialogue to broader long-term bilateral economic interests.
Ironically, while the US Federal Reserve played the dominant role in bailing out AIG this week, it was Paulson holding key strings of power in Washington while Maurice Greenberg sat on the sidelines.
In 2005, Greenberg was accused of financial malfeasance. In the ensuing scandal, he was ousted from his leadership role at AIG. Nonetheless, he retained direct ownership of 39 million shares of AIG stock, and an additional 243 million shares through the investment company that he still controls, C V Starr and Co. At the beginning of this year, his shares were worth $15.8 billion. By the close of the market on Tuesday afternoon, they were worth a little more than $1 billion.
The links that Greenberg had cultivated over the decades with the Chinese community certainly are also looking frayed when it comes to trust in AIG products in the wake of this week's collapse.
As Chan Akya reports in Asia Times Online on Wednesday ( Waiter, there's a banker in my soup), panic-stricken policyholders lined up all day on Wednesday in Singapore to surrender their policies to secure redemption value.
In Hong Kong, where AIA is the largest life insurer with more than 26% of the market and more than 1.9 million policies sold, more than 1,700 people canceled their insurance policies with AIA on Tuesday. On Wednesday, some 170 policy holders rushed to AIA headquarters to cut their insurance or investments. The Hong Kong government has demanded AIA seek approval before it removes any asset out of the territory.
One 50-year-old woman at the hectic commercial and retailing center of Causeway Bay said she decided to surrender her insurance policy today as she was worried AIA's business might be affected.
"I was supposed to pay premiums this month but I don't want to take any risk now. I am so afraid that I will lose all my money here. To keep as much money as I have in my pocket, I surrender the policy now," she said.
Should Minibond Series 3 have taken the retail route?
By R SIVANITHY September 19, 2008
IF YOU want a front-row lesson in first-class financial obfuscation for structured products, then look no further than the way the recently collapsed Minibond Series 3 notes was packaged and marketed.
Up to $200 million of these notes were sold to a gullible retail public who probably thought they were buying a five-year bond issued by six leading banks that paid a 5 per cent coupon per year but were in reality, not only exposed to the US housing market but also to a complex credit default swap arrangement whose substantive party was the now-bankrupt Lehman Brothers.
The cover of the Pricing Document prominently stated that the issue was credit-linked to six financial institutions, namely Barclays Bank, Citigroup, Deutsche Bank, Goldman Sachs, UBS and UOB - these banks being defined as Reference Entities or REs.
Much was made of the fact that the viability of the notes depended on whether these six banks or REs would go bankrupt and there are repeated warnings to this effect throughout the document. Investors were given plenty of information on the credit ratings of these six REs and links to their websites while Lehman is listed only as the Arranger in small print.
The fine print at the bottom of the cover, however, states that Lehman is also Swap Counterparty, besides being the arranger. Not many retail investors would have seen this, and if they had, few would probably have understood the importance of this information. More on this later.
Investors, however, were urged to read the Base Prospectus in conjunction with the Pricing Statement. In the former's page 24, it is stated that 'the Notes are intended to provide investors with a coupon for assuming exposure to the credit risks of companies or of sovereign states, that is, the Reference Entities'.
'By acquiring the Notes, investors can gain exposure to the credit risks of the REs without directly holding debt obligations of the REs, for example, bonds issued by the REs.'
Note that the language used creates the impression that gaining exposure to the credit risks of the six REs is something desirable - and, by extension, this suggests that the notes are good investments - when in reality, the key to the whole issue is in the words 'without directly holding debt obligations' of the REs.
In other words, the six REs are not participants in the notes, receive no money from the issue and are not issuers of the notes. Instead, the next sentence reveals all: 'This (exposure) is achieved by linking payment of the principal and/or interest on the Notes to an RE's default.'
Who provides this link? In all the documents, this is given as Minibond Ltd but this is a special purpose vehicle with only US$1,000 in capital. The substantive party behind Minibond Ltd is most likely Lehman Brothers. Here's how it works.
Lehman most probably owned securities in the six REs. In order to hedge itself against a default by any of these REs, it set up Minibond to offer notes to the public. Minibond offered these notes with attractive terms and because of clever marketing and pricing, collects a certain amount of cash from retail investors.
This money is then used to buy securities - in the case of Series 3, it was collateralised debt obligations (CDOs), most probably on US mortgage instruments. Minibond then collects the cash flows from these CDOs. In order to pay investors the quarterly coupon and to ensure no problems with currency/interest rate fluctuations, it swaps these cash flows with a counterparty, which is Lehman. It is stated elsewhere that if the swap deals fail in addition to an RE default, the whole issue will be terminated. Thus, since Lehman has failed, so has the issue.
The crux of the entire deal appears on page 17 under Credit Default Swap where it is stated that Minibond has an agreement with Lehman in which Lehman pays Minibond a premium for insuring Lehman against credit losses on the REs.
In effect, the money that Singapore retail investors exchanged for the notes were not for any bonds issued by the six names that appeared on the cover of the prospectus but instead, went towards insuring Lehman against losses in its portfolio.
The quarterly coupon investors received was not interest from the six REs but instead, Lehman paying an insurance premium, partly financed by cash obtained from CDOs.
In short, Lehman structured a synthetic derivative product to hedge its own exposure to various instruments and linked it to the default likelihood of six major banks.
Should the true nature of the instrument have been disclosed upfront? Yes, especially since it was marketed to retail investors - though it has to be said that many other notes and products have been sold in a similar manner and the only reason that the poor disclosure of this particular series of notes surfaced is that Lehman went bust. Had it not, or had it been rescued, the coupon payments would have continued as per normal and no one would have been the wiser.
Moreover, while it is possible to piece together the actual substance of these notes from the documents available, it is a tedious process and arguably not within the ability of the average retail investor.
There are many issues also unresolved - for one thing, how many other similar products are out there? How could the authorities allow the conflicts of interest inherent in one party from being the arranger, issuer and swap counterparty?
How is it that, if Lehman alone performed all these functions, there was virtually no disclosure of Lehman's financial position or credit rating? Instead, investors' attention was focused on the six REs - wrongly, as it turned out.
Finally, if disclosure was weak, then so was knowledge among distributors. Some brokers did not understand the true nature of the instrument and sold it as a bond. Maybe the name had something to do with it, though as investors have now found out painfully, what they had bought was not a bond but a convoluted swap-based instrument.
Thus, should such products be allowed to continue to come into the retail market?
4 comments:
Investors fret over Lehman’s Minibonds
By SIOW LI SEN
17 September 2008
Distributors waiting for unwinding instructions from bankrupt US bank
(SINGAPORE) Events that have unfolded in the United States over the past few days could hurt some investors here. Those who had bought Minibond notes worth almost $500 million, arranged by Lehman Brothers over the last two years, were left in the dark yesterday as to how much they might recover as there is no news yet from the bankrupt US bank.
Unlike what their name suggests, Minibonds are not bonds but a derivative product that offers investors little protection.
Meanwhile, there may be better news for those that invested in the All Weather Booster Notes arranged by Merrill Lynch that were sold earlier this month, but have not been issued yet. BT understands that the Monetary Authority of Singapore (MAS) might look at giving these investors an option to withdraw from the deal. Merrill itself has just been sold to Bank of America.
Investors who bought Minibonds are more likely to get burnt. A fair number could be retail investors given that the minimum amount sold was $5,000. The Minibond notes were sold over the last two years under series 2 to 10, the latest of which was just last month.
One retail investor who sunk $5,000 into Minibond series 3 said: ‘I should have bought a watch.’ Another who had bought $2 million worth was more sanguine, saying that he will ‘move on’.
According to one broker, the earlier Minibond series was quite popular because they offered as much as 5 per cent dividend, and were invested mainly in high yielding collateralised debt obligations (CDOs), which only got a bad name after the US sub-prime mortgage crisis broke in the middle of 2007.
Distributors of Minibonds which include local and foreign banks, brokerages and Hong Leong Finance were getting anxious calls from clients yesterday but could not shed much light as they had yet to hear from Lehman.
Said a CIMB-GK Securities executive: ‘I’m also waiting for news - I didn’t invest but some of my friends invested in it.’
Carol Fong, chief executive of CIMB-GK Securities, said that the firm was in touch with Lehman Brothers in Hong Kong to assist clients with their enquiries on the Minibonds.
‘In response to enquiries from customers, OCBC Securities has advised them to wait for further news from Lehman Brothers on how the investment bank will unwind the transactions and pay noteholders the credit event redemption amount,’ said Koh Ching Ching, OCBC Bank spokeswoman.
‘We are currently taking legal advice and will keep our clients updated,’ said Ajay Mathur, RBS, head of retail banking.
A United Overseas Bank spokeswoman said that the bank is taking a proactive approach in updating clients on the latest developments. ‘I’ve been explaining the whole day to all walks of life,’ said Daniel Seah, UOB Kay Hian senior officer. He said that there was value in the underlying assets which were invested by Minibond, a company set up to issue the notes.
Minibond has to sell these assets. After deducting the costs involved in the termination, what is left will be paid back to investors, he said. ‘The main thing is, how much investors can get back depends on the open market value of the assets.’
The problem lies in the value of the assets, such as CDOs which have become tainted by negative publicity, although not all are associated with sub-prime mortgages.
The latest Minibond series 9 and 10 which were sold last month focused on safer assets such as bonds, said Mr Seah. The underlying assets in series 9 and 10 consist of senior secured and unsecured securities issued or guaranteed by major US and European banks, according to the document lodged with MAS.
The document also said that Minibond has issued seven series of notes under the programme, with the outstanding amount at about $482 million.
As for the All Weather Booster Notes arranged by Merrill Lynch, Mr Seah said that he understands that investors could be offered a choice of backing out if they want to. Distributors may then refund their clients.
The sale of the All Weather Booster Notes closed on Sept 12 and the money collected from investors is currently held by the distributors - ABN Amro Bank, AmFraser Securities, CIMB GK, Citibank, DBS Vickers, DMG & Partners, OCBC Securities, Standard Chartered Bank and UOB Kay Hian. The notes will only be issued on Sept 20.
Russian bourses halt trading for second day
By Catherine Belton and Charles Clover in Moscow, Rachel Morarjee in London and Reuters
September 17 2008 10:03
Russia’s two main bourses, RTS and MICEX, said on Wednesday they were suspending trade until further notice from the state’s main market regulator as shares continued to tumble one day after their steepest decline in more than a decade.
The dollar-denominated RTS was down 6.4 percent and the rouble denominated MICEX was down 3.1 per cent when the suspension was enforced with the two main state-controlled banks, Sberbank and VTB leading the slide.
Earlier on Wednesday a high-level government source said the government would unveil measures aimed at stabilising the market situation in the next two to three days.
“Certain signs of a crisis are seen on the market but they are mostly emotional,” the source who asked not to be named told the Reuters news agency.
“The measures which were agreed yesterday at a meeting chaired by First Deputy Prime Minister Igor Shuvalov will be made public within two or three days,” he added.
Russian shares suffered their steepest one-day fall in more than a decade on Tuesday, losing up to 20 per cent, as a sharp slide in oil prices and difficult money market conditions triggered a rush to sell.
The heads of the Russian central bank, the finance ministry and the financial market regulator met on Tuesday night for an emergency discussion on ways to halt the crisis.
Earlier, trading had been suspended on both the Micex and RTS stock exchanges as investors ignored assurances by Russian officials and a cycle of distrust set in amid liquidity fears.
Margin calls forced domestic traders to liquidate positions and brokers pulled credit lines. At least one Moscow bank failed to meet payments.
The rouble-denominated Micex Index closed 17.75 per cent down, the sharpest one-day drop since the August 1998 financial crisis, while the dollar-denominated RTS index closed down 11.47 per cent, its lowest lvel since January 2006.
Interbank money market rates climbed to 11 per cent, their highest since a mini-banking crisis in summer 2004.
Chris Weafer, chief strategist at Uralsib investment bank: “We’re in completely uncharted territory where the prevailing emotion is of fear and numbnes. No one knows where this could stop”.
Alexei Kudrin, finance minister, insisted that the financial system was not in a systemic crisis but the central bank injected a record $14.16bn in one-day funds into the money market.
The finance ministry also placed an additional R150bn ($5.8bn) in one-month deposits into the banking system. Konstantin Korishchenko, central bank deputy, told Russian news agencies that the bank and the finance ministry could provide a total of $117.6bn in liquidity to the banking sector.
But market players said banks were ceasing to lend to second and third-tier companies and brokers were pulling credit lines. KIT Finance, big Moscow investment house confirmed rumours that it had been unable to make payment on a series of short-term loans.
It said: “In connection with the fact that a series of our clients did not meet their obligations to our bank, we have not met our obligations to our counterparties.
“We recognise our responsibility to our counter-parties and to the market and we are working intensively to resolve the situation.”
Andrei Sharonov, managing director of Troika Dialog, a Moscow investment bank, and a former deputy economic minister, said: “This is a vicious circle,” said,.
“It is a situation of total mistrust. The liquidity crisis is being caused by a crisis of confidence in which people are frightened to borrow and frightened to lend.”
Shares in Russia’s biggest state-controlled banks led the slide with Sberbank, the state-controlled savings bank, closing 21.72 per cent down and VTB losing 29.26 per cent. The bank was suffered on investor fears about its securities portfolio, which makes up about 10 per cent of its assets.
China's imploding US ally
By Richard Komaiko and Chris Stewart
Sep 18, 2008
The collapse of US insurance giant AIG and its US$85 billion takeover by the US government on Tuesday takes the US financial crisis right to the heart of China's development as a capitalist country.
AIG, the world's sixth-largest company by assets and biggest insurer, according to the Forbes Global 2000 list for 2007, is one of the few US institutions to be founded in China, its roots dating from 1919 when Cornelius Vander Starr, a veteran of World War I, founded a small insurance company in Shanghai called American Asiatic Underwriters, later to become AIG.
More famously, Starr's successor, Maurice R Greenberg, built relations with China's leadership from 1975, his first visit to the country predating by several years the revolutionary moves by Deng Xiaoping to open up China to Western influences.
In this, Greenberg proved himself a master of developing guanxi, a term summarized as "connections" and now recognized as holding the key to successful development of business in China.
According to Benjamin A Shobert, reviewing Robert Buderi and Gregory T Huang's book of that name, "guanxi is commonly perceived as partnering and understood to focus the attention of Westerners on the great importance that the Chinese put on relationships. To most Westerners guanxi emphasizes personal relationships in contrast to the contractual, non-relational business practices common in America.
"While a portion of the word's meaning can simply be seen as stressing relationships, the authors emphasize that a better understanding of the word is to emphasize four things: trust, favor, dependence and adaptation - the last what the authors call 'patience and cultivation'."
Greenberg's patience and cultivation of relations with China's leaders saw him play a key role in building links between the US and China, while his company had a front-runner's view as it and China metamorphosed into leading players in the global business world.
Starr was the initial pathbreaker. When he set up shop in Shanghai, there were many other Westerners selling insurance in the city, then as now the country's financial hub. But these potential rivals almost exclusively concentrated their efforts on selling to other Westerners. Starr realized that the Chinese people themselves represented a vast and underserved market for insurance, with relatively low risks. This insight would enable him to become one of the wealthiest men in the world.
Within 10 years, Starr had established offices across China, Hong Kong, the Philippines, Indochina, Jakarta and Kuala Lumpur. In 1926, he opened his first office in the United States. The growth of his company was temporarily disrupted by the Chinese civil war and the general turmoil in East Asia. In 1939, Starr moved the headquarters of his corporate empire to the Empire State - New York. From there, his company and fortune grew many fold.
In 1962, Starr appointed Greenberg to head AIG's then failing North American operations. In a remarkable display of business prowess, Greenberg turned the unit around, a feat that encouraged Starr to name him his successor before passing away in 1968.
Starr bequeathed all his wealth to the C V Starr Foundation, one of the largest foundations in the United States, with over $3 billion in assets. Greenberg became the chairman of this foundation while also assuming the reins at AIG. Under his leadership, the company prospered while he himself became one of the kingpins of American foreign policy.
In 1977, he became a member of the Council of Foreign Relations, arguably America's most influential think-tank, and over the next three decades he would hold numerous leadership positions in the council, culminating in 1997 with the founding of the Greenberg Chair.
Today, the Greenberg Chair "is the senior person directly responsible for the substantive content and management" of the think-tank. Greenberg has also been a member of the board of directors of the New York Stock Exchange; a former chairman, deputy chairman and director of the Federal Reserve Bank of New York; a member of the US-China Business Council; the chairman of the Asia Society; and a member of the Advisory Committee for Trade Policy and Negotiations to the President of the United States.
With all of these roles, plus his control over the resources of the Starr Foundation and the American International Group, Greenberg's power to shape America's foreign policy was rivaled only by Citizen Kane.
Greenberg's foreign policy views were heavily influenced by two factors. One was his experience in World War II of the liberation of the Nazi concentration camp at Dachau. The other was the legacy of Starr's love for China. This latter factor would ultimately play an enormous role in shaping America's policy toward China for more than a quarter of a century.
In all of his actions and with all of his influence, Greenberg exercised a sanguine desire to foster reconciliation and cooperation between the United States and the People's Republic of China. The impact of this desire can be seen in the fingerprint that Greenberg has left on academic and policy institutions around the United States.
At his discretion, the Starr Foundation has funded numerous fellowships with the Asian Cultural Council, donated $300,000 to Columbia University's East Asian Library and considerably more to Berkeley's C V Starr East Asian Library. Most recently, Greenberg and the Starr Foundation each donated $25 million to Yale University to create the Maurice R Greenberg Yale-China Initiative.
Greenberg's lobbying efforts were a driving factor behind America's decision to support China's admission to the World Trade Organization, which it officially joined in November 2001. Undoubtedly, a fair amount of the credit for the creation of an American policy environment that is favorable to China is due to Greenberg and the resources that were generated by AIG.
AIG's own development in China took various, often ground-breaking, forms. China America Insurance Company was formed in 1980 as a 50-50 joint venture between AIG companies and the People's Insurance Company of China (PICC), the first joint venture between a foreign insurance organization and PICC. Personal ties with future leaders were also forged. In 1990, AIG financed and chaired a financial services conference in Shanghai to assist then city mayor and later country premier Zhu Rongji in introducing the international financial community to investment opportunities in Shanghai.
Two years later, AIG unit American International Insurance (AIA) established a branch office in Shanghai, to become the first foreign-owned life and non-life insurance business to receive a license from the People's Bank of China. In 1995, AIG companies won licenses to extend operations to Guangzhou, the key city in the country's efforts to open up to the outside world of commerce, and a year later it secured a lease allowing it to return in 1998 to the Shanghai Bund, home of C V Starr's original Shanghai insurance companies.
In 2003, by which time AIG's presence in the country extended to several provinces, the insurer acquired a 9.9% stake in PICC Property and Casualty (PICC P&C) when the Chinese company listed in Hong Kong. In 2005, as the Chinese government continued to ease its grip on the financial sector, AIG Private Bank became the first foreign private bank to receive approval to open a representative office in Shanghai.
One immediate effect of AIG's collapse could be on PICC P&C's stock price, which would be at risk if AIG liquidated its stake, Citigroup analyst Bob Leung said in a research note on Tuesday.
Chinese insurers also face a greater counter-party risk from the collapse of AIG than from Lehman Brothers, the other US financial giant that crumpled in the past few days. Lehman, which has filed for bankruptcy has significant exposure in Asia. "Given the very low life insurance accession rate in Asia, "if AIG loses its A- rating or its situation worsens significantly, we expect the financial impact to affect mainly P&C insurers," Leung wrote.
S&P lowered AIG's long-term counterparty rating to 'A-' on Monday.
China's insurance regulator declared that AIG businesses in the country were sound, echoing statements from the rest of the region. This is however a big concern going forward, given the large market share that AIG commands in many Asian markets, and the sheer volume of domestic securities that it holds across the region.
Other insurers in China meanwhile may gain from AIG's loss. "China Life, with a strong balance sheet and limited non-yuan asset exposure (less than US$3 billion and mainly in H-stock [Hong Kong listed shares] and cash) has the strongest balance sheet of all regional insurers and is likely to benefit from a 'flight to quality' perspective," Leung wrote.
The sudden decline of AIG may lead to a reduced influence of the company in international affairs, and a cut in the amount of resources that are lavished on America's foreign policy establishment for the purpose of encouraging China-friendly policy.
As it is, Greenberg's pathfinding and influential role in China has already been superceded to a large extent by the huge influx of other Western business leaders, notable among them Henry Paulson, who as chairman and chief executive of Goldman Sachs spent much time and and effort building his own relations with the present Chinese leadership.
Paulson's appointment as US Treasury Secretary in 2006 came at a time of simmering tensions between Washington and Beijing over China's reluctance to strengthen its currency and rein in the growing trade surplus it enjoyed with the US. Demands for faster appreciation of the yen continue, but their tenor has become less strident since Paulson took up his government post, with the focus on relations changing through the Strategic Economic Dialogue to broader long-term bilateral economic interests.
Ironically, while the US Federal Reserve played the dominant role in bailing out AIG this week, it was Paulson holding key strings of power in Washington while Maurice Greenberg sat on the sidelines.
In 2005, Greenberg was accused of financial malfeasance. In the ensuing scandal, he was ousted from his leadership role at AIG. Nonetheless, he retained direct ownership of 39 million shares of AIG stock, and an additional 243 million shares through the investment company that he still controls, C V Starr and Co. At the beginning of this year, his shares were worth $15.8 billion. By the close of the market on Tuesday afternoon, they were worth a little more than $1 billion.
The links that Greenberg had cultivated over the decades with the Chinese community certainly are also looking frayed when it comes to trust in AIG products in the wake of this week's collapse.
As Chan Akya reports in Asia Times Online on Wednesday ( Waiter, there's a banker in my soup), panic-stricken policyholders lined up all day on Wednesday in Singapore to surrender their policies to secure redemption value.
In Hong Kong, where AIA is the largest life insurer with more than 26% of the market and more than 1.9 million policies sold, more than 1,700 people canceled their insurance policies with AIA on Tuesday. On Wednesday, some 170 policy holders rushed to AIA headquarters to cut their insurance or investments. The Hong Kong government has demanded AIA seek approval before it removes any asset out of the territory.
One 50-year-old woman at the hectic commercial and retailing center of Causeway Bay said she decided to surrender her insurance policy today as she was worried AIA's business might be affected.
"I was supposed to pay premiums this month but I don't want to take any risk now. I am so afraid that I will lose all my money here. To keep as much money as I have in my pocket, I surrender the policy now," she said.
Should Minibond Series 3 have taken the retail route?
By R SIVANITHY
September 19, 2008
IF YOU want a front-row lesson in first-class financial obfuscation for structured products, then look no further than the way the recently collapsed Minibond Series 3 notes was packaged and marketed.
Up to $200 million of these notes were sold to a gullible retail public who probably thought they were buying a five-year bond issued by six leading banks that paid a 5 per cent coupon per year but were in reality, not only exposed to the US housing market but also to a complex credit default swap arrangement whose substantive party was the now-bankrupt Lehman Brothers.
The cover of the Pricing Document prominently stated that the issue was credit-linked to six financial institutions, namely Barclays Bank, Citigroup, Deutsche Bank, Goldman Sachs, UBS and UOB - these banks being defined as Reference Entities or REs.
Much was made of the fact that the viability of the notes depended on whether these six banks or REs would go bankrupt and there are repeated warnings to this effect throughout the document. Investors were given plenty of information on the credit ratings of these six REs and links to their websites while Lehman is listed only as the Arranger in small print.
The fine print at the bottom of the cover, however, states that Lehman is also Swap Counterparty, besides being the arranger. Not many retail investors would have seen this, and if they had, few would probably have understood the importance of this information. More on this later.
Investors, however, were urged to read the Base Prospectus in conjunction with the Pricing Statement. In the former's page 24, it is stated that 'the Notes are intended to provide investors with a coupon for assuming exposure to the credit risks of companies or of sovereign states, that is, the Reference Entities'.
'By acquiring the Notes, investors can gain exposure to the credit risks of the REs without directly holding debt obligations of the REs, for example, bonds issued by the REs.'
Note that the language used creates the impression that gaining exposure to the credit risks of the six REs is something desirable - and, by extension, this suggests that the notes are good investments - when in reality, the key to the whole issue is in the words 'without directly holding debt obligations' of the REs.
In other words, the six REs are not participants in the notes, receive no money from the issue and are not issuers of the notes. Instead, the next sentence reveals all: 'This (exposure) is achieved by linking payment of the principal and/or interest on the Notes to an RE's default.'
Who provides this link? In all the documents, this is given as Minibond Ltd but this is a special purpose vehicle with only US$1,000 in capital. The substantive party behind Minibond Ltd is most likely Lehman Brothers. Here's how it works.
Lehman most probably owned securities in the six REs. In order to hedge itself against a default by any of these REs, it set up Minibond to offer notes to the public. Minibond offered these notes with attractive terms and because of clever marketing and pricing, collects a certain amount of cash from retail investors.
This money is then used to buy securities - in the case of Series 3, it was collateralised debt obligations (CDOs), most probably on US mortgage instruments. Minibond then collects the cash flows from these CDOs. In order to pay investors the quarterly coupon and to ensure no problems with currency/interest rate fluctuations, it swaps these cash flows with a counterparty, which is Lehman. It is stated elsewhere that if the swap deals fail in addition to an RE default, the whole issue will be terminated. Thus, since Lehman has failed, so has the issue.
The crux of the entire deal appears on page 17 under Credit Default Swap where it is stated that Minibond has an agreement with Lehman in which Lehman pays Minibond a premium for insuring Lehman against credit losses on the REs.
In effect, the money that Singapore retail investors exchanged for the notes were not for any bonds issued by the six names that appeared on the cover of the prospectus but instead, went towards insuring Lehman against losses in its portfolio.
The quarterly coupon investors received was not interest from the six REs but instead, Lehman paying an insurance premium, partly financed by cash obtained from CDOs.
In short, Lehman structured a synthetic derivative product to hedge its own exposure to various instruments and linked it to the default likelihood of six major banks.
Should the true nature of the instrument have been disclosed upfront? Yes, especially since it was marketed to retail investors - though it has to be said that many other notes and products have been sold in a similar manner and the only reason that the poor disclosure of this particular series of notes surfaced is that Lehman went bust. Had it not, or had it been rescued, the coupon payments would have continued as per normal and no one would have been the wiser.
Moreover, while it is possible to piece together the actual substance of these notes from the documents available, it is a tedious process and arguably not within the ability of the average retail investor.
There are many issues also unresolved - for one thing, how many other similar products are out there? How could the authorities allow the conflicts of interest inherent in one party from being the arranger, issuer and swap counterparty?
How is it that, if Lehman alone performed all these functions, there was virtually no disclosure of Lehman's financial position or credit rating? Instead, investors' attention was focused on the six REs - wrongly, as it turned out.
Finally, if disclosure was weak, then so was knowledge among distributors. Some brokers did not understand the true nature of the instrument and sold it as a bond. Maybe the name had something to do with it, though as investors have now found out painfully, what they had bought was not a bond but a convoluted swap-based instrument.
Thus, should such products be allowed to continue to come into the retail market?
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