Hong Kong Banks Agree to Repurchase Lehman Minibonds

Looks like Hong Kong investors are slowly getting what they wanted after fighting hard for months. Singaporeans affected by the Lehman default can only envy them.

Hong Kong Banks Agree to Repurchase Lehman Minibonds

Bloomberg
22 July 2009

BOC Hong Kong Holdings Ltd. and 15 other banks agreed to pay at least 60 cents on the dollar to investors in notes linked to failed Lehman Brothers Holdings Inc. after a 10-month dispute that stirred street protests and forced lenders to change the way they sell investment products.

The banks will repurchase the so-called Lehman minibonds in two stages, Securities and Futures Commission Chief Executive Martin Wheatley said at a press conference today. The total compensation will amount to about HK$6.3 billion ($813 million), said central bank Deputy Chief Executive Y.K. Choi.

Hong Kong, where banks sold $1.8 billion of the notes, is an example of how the financial devastation resulting from Lehman’s Sept. 15 bankruptcy rippled across the globe. As the securities plunged and allegations of mis-selling mounted, citizens who lost their savings took to the streets and lawmakers scolded the heads of the city’s central bank and securities watchdog in public.

The minibond debacle “exposes the problems with both the regulations and banks’ selling methods,” Peter Wong, head of the Hong Kong unit of HSBC Holdings Plc, said in a July 13 interview.

HSBC, the biggest bank in Hong Kong by branches, and its local subsidiary, Hang Seng Bank Ltd., didn’t sell the notes.

Note buyers will receive at least 60 percent of the principal, Wheatley said. About 29,000 minibond investors are eligible for compensation. Banks’ losses related to the refunds are “difficult to estimate,” Choi said.

‘Not Acceptable’

Beyond the 60 percent floor, refunds will depend on how much collateral banks can collect from Lehman’s liquidators. If banks recover the full collateral, minibond investors will be fully compensated. Banks will use fees earned from the note sales to fund the recovery effort.

“If the agreement is accepted, the vast majority of investors will be able to get back 70 per cent or more of their original investments,” Hong Kong Financial Secretary John Tsang said in a statement today. “The agreement will put an end to more than 10 months of distress for investors.”

The proposed compensation is “not reasonable,” Peter Chan, chairman of the Allied Victims of Lehman Products, said in a phone interview. The group, which Chan said represents about 8,000 minibond investors, will reject the proposal, he said.

“I can’t agree, and won’t accept the settlement plan as it’s not acceptable and fair to us,” Chan said. “How can the SFC let the banks get away with it so easily?”

Mentally Ill Buyers

Lehman’s bankruptcy caused the value of the notes to collapse, even though they were tied to the debt of other companies that remained viable. The minibonds were distributed by local brokerage Sun Hung Kai Financial Ltd. and sold by 19 Hong Kong banks.

The inquiry into the alleged mis-selling prompted the Hong Kong Monetary Authority to propose that banks physically separate deposit-taking and investment businesses at their branches and tape all conversations related to sales of investment products.

The notes, guaranteed by Lehman and linked to the debt of major Hong Kong companies like Hutchison Whampoa Ltd. and Sun Hung Kai Properties Ltd., were sold to more than 40,000 investors. Among buyers were elderly and poorly educated people as well as mentally ill individuals, according to an investigation by the city’s central bank made public by lawmakers on April 28.

Buyers of the Lehman minibonds were required to invest at least $5,000, compared with $100,000 for most bonds sold to institutions, making them popular among retail investors.

Yam Testifies

Sun Hung Kai Financial in February agreed to fully repay minibond buyers, putting pressure on other sellers to follow suit. Sun Hung Kai paid about HK$86 million and KGI Asia Ltd., the local unit of the Taiwan-based brokerage, spent about HK$1.5 million to repurchase the notes.

Backed by lawmakers and volunteer groups, investors have staged almost daily protests since October, demanding refunds.

At a July 1 march, about 2,000 protesters wore black T- shirts and carried placards accusing banks that distributed the products of fraud and betraying public trust. Some tried to cross a police barrier to break into the Bank of China building in the city’s Central business district.

The scandal touched some of the city’s most senior financial officials.

Joseph Yam, the outgoing head of the central bank, has testified six times in front of a special committee set up by the city’s parliament, and lawmakers accused his organization of negligence. Wheatley testified four times.

‘Give and Take’

On July 3, local newspapers including Sing Tao Daily reported that 16 Hong Kong banks had sent a formal proposal to the SFC offering investors compensation of 60 percent to 70 percent of face value.

Quizzed by lawmakers about the proposals at the time, Wheatley said partial compensation could be unfair to some investors.

“When you have a negotiation there’s bound to be posturing from both sides,” Regina Ip, an independent legislator who was involved in brokering the settlement, said in a July 16 interview. “At the end of the day if you want to get to yes, there has to be give and take.”

In Singapore, where a total of S$508 million ($352 million) of Lehman-linked products were sold to investors, the central bank in early July banned DBS Group Holdings Ltd. and nine other financial institutions from selling structured products for six months to two years.

The ban won’t be lifted until the central bank is “satisfied” that the institutions have taken steps to improve their processes for offering financial advisory services. A group of 204 investors in July sued DBS, Singapore’s largest bank, over losses on Lehman minibonds.

Monetary Authority of Singapore deputy Chairman Lim Hng Kiang said July 20 that a total of about S$107 million in settlement offers have been made to some 3,900 investors.

Hong Kong Banks Agree to Repurchase Lehman Minibonds [via]