Lehman-Linked Investments

In Singapore, many investors of Lehman-linked investment products are still upset about their loss. When Lehman collapsed, the value of their investments similarly collapsed to zero. Their main grouse is that they have been misled by the banks and relationship managers who sold them the products into believing that the notes were of low-risk.

The fixed deposit rates in Singapore are pittance, usually <1% while some of these investment products promised returns of up to 5% over a 5-year tenor. An investor with S$200,000 cash coolly collects $2,500 every quarter, versus the $500 per quarter he would otherwise have received under a fixed deposit. Isn't that an attractive proposition?

Now, even as the fixed deposit holders made the switch, surely they knew that there was no free lunch. Banks are not silly, not are they philanthropic. You can be sure that the risk of the product would be appropriately reflected in the differential in returns.

It may require a rocket scientist to understand the intricacies of these instruments, how it's priced and so on, so don't even try. [A certain bank I know did indeed employ several ex-nuclear scientists from the ex-Soviet bloc to do financial engineering.] But that's besides the point. To me, there is no need to sweat over the working of these products. Laymen like you and me can be guided by a simple rule: high risk = high returns. That's all. Investors who expect high returns should be aware that they need to take on higher risks. That's for sure. Don't fool yourself or let anyone fool you.

Then there are the complaints on how they are sold these products. I agree. Relationship managers can be very persuasive, or ruthless, however you look at it. Nevertheless, as adults living in an urban and competitive environment, potential investors must be responsible for their own decisions - they cannot plead naivete. Nobody held a gun to their heads to sign on the dotted line. Everyone knows the RMs earn a commission from the deals that they close. There would already be a conflict of interest right from the start. Push comes to shove, who will they take care of? The investor or their own pocket?

I may sound very unsympathetic but there are several lessons to be learnt, one of which is that one needs to take responsibility for one's action. Retirees or not, the same lesson needs to be learnt. Painful though it may be.

Other lessons: You win some, you lose some. Don't put all your eggs in one basket. There is no free lunch, caveat emptor. Finally, don't expect the government to bail you out.

If the banks choose to refund or compensate certain groups of investors (the retirees, for example, as suggested by the authorities), it should be clear that this is done out of goodwill. Investors have no right to demand or expect a full return of their capital. To think otherwise will have an impact on how the financial market operates and re-defines the notion of risk as it is understood today.