Hellfire from Swiber Bond and Lehman Brothers Minibond

Sometimes, life is stranger than fiction. The recent implosion of Swiber junk bond brings back memories of Lehman Brothers Minibond saga in 2008. About 10,000 retail investors in Singapore lost their investments totaling more than $500 million in products linked to Lehman Brothers. The similarity between the hellfire from Swiber Bond and Lehman Brothers Minibond is that DBS was one of the financial institutions distributing these high risk investment products.

In the world of investing, there are many factors why things can go wrong. Even government can sometimes make dubious investment decisions. The most infamous example is the fiasco concerning eight town councils run by People’s Action Party (PAP) which had $16 million invested in the various Lehman Brothers-linked products. Many analysts were shocked and disturbed that town councils had invested in such structured product using tax payer’s fund. After all, the mandate of town council is different from sovereign wealth funds like Temasek Holding.

Lehman Brothers Minibond Saga

Notwithstanding the loss suffered by PAP town councils, the collapse of Lehman Brothers triggered one of the most intriguing financial hellfire in Singapore. Investors who had bought High Notes 5 from DBS Bank were shell-shocked to learn that they could get nothing from the forced sale of the underlying collateral. Many investors were angry that they were misled into buying such high risk product. Apparently, many of them were elderly and less-educated individuals.

The minibond saga led to a lawsuit against DBS Bank filed by 204 investors for $17 million in July 2009. They were unhappy with the bank’s settlement offers for the losses arising from the High Notes 5.

Overall, more than 5,500 complaints were lodged against various financial institutions selling Lehman Brothers minibonds. Arising from this, Monetary Authority of Singapore took actions against these institutions and reviewed the regulatory framework. But the important lessons have not being learned by investors. Fast forward 8 years later, history repeats itself in the case of Swiber junk bond.

Swiber Junk Bonds

Seduced by the high returns and against the low-interest rates backdrop, many investors bought Swiber bonds from local financial institutions like DBS, without realizing that they are actually “junk bonds”. Investors were looking for fixed income sources and were attracted by the yields offered by the bond. Ultimately, investors need to realize the risk difference in government bonds and corporate bonds.

Bonds issued by creditworthy governments like Singapore are given high ratings by agencies like Standard and Poor’s while corporate bonds which are given grades lower than investment grade are considered junk bonds, which are likely to default in payments. Investors must understand that not all bonds are safe haven instruments like physical gold.

At this point of time, it is important to note that Swiber bond has been sold to accredited investors during the period when demand for yield was high. Last year, MAS has revised the law to afford more protection for accredited investors. I highlighted about this in my previous article. In spite of this, regardless whether you are an accredited investor or not, you need to take charge of your financial choices and not leave your financial destiny in the hands of the financial institutions.

There is nothing wrong with the current regulatory framework, even though there are many online debates arguing whether junk bonds should be sold to accredited investors in the first place. But just think about this. If Singapore wanted to position itself as a global financial hub, how can policy-makers develop policies that restrict junk-bonds to be accessible to institutional investors only? By setting such an onerous rule, it is difficult to imagine Singapore evolving into an international financial hub. The right approach should be to fine-tune investor’s risk-taking approach and highlight the risks involved.

I am not a fan of bond but nevertheless it is still considered by many financial experts as a viable form of fixed income. The rule of the game is always to diversify your wealth across different asset classes and not put all your eggs in one basket.

My wealth building strategy

My portfolio consists of property, stocks, cash, insurance and physical gold. After purchasing my executive condominium, I have exhausted all my investment war-chest. Thus, for the next few years, it will be a re-building process of my emergency fund and investment portfolio. I don’t see myself buying or investing in bonds.

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Magically yours,

SG Wealth Builder