Minibonds were rated high risk, banker says

Minibonds were rated high risk, banker says

Dennis Eng


Bank of China (Hong Kong) sold about HK$5.8 billion worth of Lehman Brothers-related minibonds that the bank rated as high risk, vice-chairman and chief executive He Guangbei told legislators yesterday.

The bank was the largest local distributor of minibonds guaranteed by Lehman. When the Wall Street giant went bankrupt in September 2008, Hong Kong investors lost billions of dollars on minibonds that became worthless. Minibonds are high-risk, credit-linked derivatives.

"We did rate the minibonds as high risk, the reason being that it was not principal protected," He said.

Testifying for the first time before a Legislative Council panel investigating the Lehman minibond debacle, He (pictured) defended the bank's sales of the minibonds between 2003 and 2008, saying they accounted for just 1.74 per cent of its total retail structured financial products of roughly HK$330 billion. He said, given the low interest rate environment at the time, there was keen market demand for the minibonds, which offered higher returns.

Different series of the minibonds were sold but not all were distributed by the bank. The fifth, sixth and seventh series were not sold because of the market downturn due to the outbreak of the Sars virus. Series 36 was also not sold by the bank in March 2008 because of "uncertainties in the market" as rumours spread of the deteriorating investment banking situation in the US, He said.

He, who appeared before the panel with his deputy, Lam Yim-nam, said all bank staff were kept abreast of the latest situation in the US from August 2008 to help answer any customer queries about their investments.

Two of the bank's staff were charged in connection with the sale of the products in March this year.

A settlement offer by 16 banks to buy back soured minibonds from about 25,000 investors meant those who accepted the terms would recoup between 60 per cent and 70 per cent of their initial investments.

He and Lam will appear before Legco again on Friday.

October 5, 2010

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http://hk.myblog.yahoo.com/hanhoco/article?mid=2175