Prospectus of Minibonds

Prospectus of Minibonds
寄件人﹕ abraham Razack
收件人﹕ jeff wang


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Thanks for your email which I would take note for our hearings . Regards Abraham Shek

Sent from my iPad

On Sep 16, 2010, at 12:48 AM, jeff wang wrote:


HKMA complaint no : R057 NLTE0011
主題： Complaint regarding the sale of investment products related to Lehman Brothers by banks

Legco Ref : CP/C 635/2008

Dear Sir,

I got Prospectus of Minibond series 32 from email in 2007 from Shanghai Commercial Bank , these documents are now these propectus information are avaliable in SFC.

I only bought Minibond series 20,21 from Shanghai Commercial Bank with verbal explainations inside the bank during 2005, and Minibonds series 34A later 2007 by telephone even thru I did not want to buy series 34A at that time, but the bank told me the collaterals were General Electric bonds and every banks were fighting to get this series to sell to their customers.

I never remember that I heard any mentioning of CDOs during the sales of Minibonds series 20,21 inside Shanghai Commercial Bank in 2005 and later around 2006 in telephone on Octave Notes 6, and I just used the search engine and found out that only starting in Minibonds series 22 that CDOs were mentioned in prospectus. I read about CDOs in 2006,2007 and the news were mostly negetive news for CDOs were related to US housing mortgage being packaged into CDOs, and I alway believed CDOs were very high risk products.

Shanghai Commercial Bank never changed their risk form, and now they still rated Minibonds, Constellation Notes and Octave Notes as low risk in their documents since 2004,2005 and that time no CDOs were mentioned in the Minibond prospectus. But Bank of China did rated every structure products including Octave Notes 15 and they sold as High Risk products started in end of year 2006 but not early in 2006 and hide their sales documents from me and some of their customers that bought these structure products at that time. So I suspected Bank of China did know that these structure products were high risk with CDOs involved in end of year 2006 while many other banks that sold these structure products before Bank of China started to sell structure products did not look very closely on these changes.

7th, Dec 2010

Simon Lee Lecturer in Chinese University as witness in court against BOCHK staffs with statement stated that :

1. Minibond 21, there was no mentioning of priciple protected in the prospectus

2. CDO was not mentioned in series 21.

3. Collaterals might not pay back the priciple amount and in many early Minibonds, Principle not protected were not mentioned but in my case of Octave Notes, these were mentioned in propectus but never explained as high risk by the bank but being cover up in the sales.

4. CDOs were related to US housing markets such as the collaterals in Minibonds 34 Tranche A .

5. Default on lower Tranche (C or D) on notes might not lead to default on better Tranche (A or B). ( For my case, Default on Octave Notes 15C and 15D leads to buyback of Octaves Notes 15A and 15B but in fact Octave Notes 15A, 15B still had not defaults but Morgan Stanley get nearly all the money away from investors)

6. Credit events consists of three type : bankrupt, restructuring and spin off, no interest payment and these were never mentioned in all bank misselling cases.

7. During credit events of the reference entity mainly blue chip companies, the investors should cover the obligations of the reference entity which were listed as AAA but these notes are linked with mostly subordinated bonds around 5% interest but these subordinated bonds would be worth close to nothing. So during the sales of these notes, the bank staffs in facts were telling lies that these Minibonds were link to AAA/AA rated companies but in fact to these subordinated bonds.
In finance, subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts should a company fall into receivership or be closed.

8.During credit events of the Swap CDS, which were intended for protection of the reference entities and higher yield to pay interests to the investors. But only some Minibonds series had these protection and some series had not. But it is also possible for loss all the amount of CDS, much larger than the values of investors invested to the Swap counterparties involved, if duty of care and Banks’ due diligence was at faulty for not checking these CDS during and after the sales of these structure products.

9.More facts on CDOs rating from Simon Lee saying that credit rating varies according to time : Insured CDOs May Have AAA Ratings Cut Four Levels, Fitch Says Posted on Thursday, November 8th, 2007 at 1:47 pm by Lars Toomre Business Intelligence Credit Derivatives Enterprise Risk Management Market RiskSecuritizationStructured Products.On Thursday November 8th 2007 at 12:40 EST, Bloomberg News ran this little story by Cecile Gutscher: Insured CDOs May Have AAA Ratings Cut Four Levels, Fitch Says. Toomre Capital Markets LLC just three hours earlier posted a note entitled Incestuous Mix: Structured Credit, Financial Guarantors and Rating Agencies that was focusing on what might happen if the financial guarantors were downgraded.

Apparently, if you were an investor in collateralized debt obligations that were rated AAA because of guarantees issued by bond insurers including MBIA Inc. and Ambac Financial Group, Fitch Ratings has now decided that the credit ratings may be cut in one swell swoop by as much as four rating levels. According to this Bloomberg article, Fitch rating analyst Thomas Abruzzo said in an interview today that "We expect there could be situations that could lead to downgrades of three to four notches on insured structured-finance CDO transactions."

New York-based Fitch said Nov. 5 it may lower the top ratings of bond insurers after a review that takes into account the CDOs they guarantee. Any bond insurer that fails the new test may be downgraded within a month unless the company is able to raise more capital. ``The bond insurers themselves remain AAA but there is the potential that companies could fall short of capital and also be downgraded, but we don't expect below the AA category,'' Abruzzo said. AA is the third-highest investment grade.

Oh well… There goes another linchpin under the high-grade bond market. No longer can one buy an insured bond and assume that the bond will remain in its original rating category throughout its life cycle. Perhaps someone can now suggest what credit enhanced bonds are really worth??? Does a AAA credit rating really mean anything??? Shouldn't AAA-rated structured finance transactions trade more cheaply than AA-rated corporate debt, or maybe even A-rated corporate debt? Or maybe it really is worth JUNK???

After all, one has to use one of those modern computers to calculate the value of the structured finance security? There is no absolutely transparency like there is in whether a company might be able to pay back its debts! The structured finance market used to have some degree of trust. With these dramatic ratings downgrades in portfolios that traditionally have seen small changes in principal value, is there any question about why there is a complete breakdown in reputation and trust? Widows and orphans bought high-grade bonds because of their high quality and predictable cash flows. What is a rating worth if it can go from AAA to BB on one Friday afternoon? What the heck good is bond insurance if a rating agency can suddenly bring down the rating of the insurer and all of the insured bonds that it backs? In short, What good is a credit rating?

10. More facts about CDO, CDS inside Minibonds such as those collaterals inside Minibonds series 15A, 15B, 18A, 18B MBIA was related to US housing market (HSBC USA, dated 21 Nov. 2008) as Simon Lee quoted about MBIA is related to US housing market :

Dec. 20, 2007, 7:11 p.m. EST

MBIA slumps on concern about CDO exposures
Bond insurer has $8.14 billion of CDO-squared exposures; analyst
Alert By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- MBIA Inc. shares fell more than 26% Thursday after the bond insurer disclosed $8.14 billion of exposure to complex credit products known as CDO squareds.

Also on Thursday, Fitch warned that it may cut MBIA's AAA rating to AA+ if the company can't boost its capital during the next four to six weeks.

About 85% of the collateralized debt obligations in question are other CDOs, with most of the rest being residential mortgage-backed securities, MBIA reported on its Web site.


/quotes/comstock/13*!mbi/quotes/nls/mbi
MBI 10.01, -0.04, -0.40%

/quotes/comstock/11i!abkfq
ABKFQ 0.15, +0.01, +6.52%


MBI
200%100%0%-100%JJASON
More than half of the underlying loans in the vehicles were originated in 2006 and 2007, the insurer also noted. Those are years of particularly lax underwriting standards in the mortgage industry.

"We are shocked that management withheld this information for as long as it did," Ken Zerbe, an analyst at Morgan Stanley, wrote in a note Thursday. "MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors."

MBIA shares fell 26% to close at $19.95 on Thursday. The stock hit $18.84 earlier in the day, its lowest level for at least a decade, according to FactSet data.

Bond insurers agree to pay principal and interest when due in a timely manner in the event of a default. It's a $2.3 trillion business that offers a credit-rating boost to municipalities and other issuers that don't have AAA ratings.

Shares of bond insurers such as Ambac Financial /quotes/comstock/11i!abkfq (ABKFQ 0.15, +0.01, +6.52%) and MBIA /quotes/comstock/13*!mbi/quotes/nls/mbi (MBI 10.01, -0.04, -0.40%) have slumped in recent months on concern they could suffer losses from guaranteeing complex securities such as CDOs, which are partly backed by subprime mortgages.

CDOs are made up of bits of asset-backed securities with underlying collateral such as mortgages and auto loans. CDO-squared vehicles take that slicing and dicing one step further by investing in parts of other CDOs.

Ambac insured $2.4 billion of these CDOs of CDOs in 2007. After the company disclosed these exposures on its Web site on Aug. 10, its shares slumped almost 20% during the following four trading days.

Partly because of this exposure, Ambac has been considered more risky than MBIA. But that's changed now, according to Morgan Stanley's Zerbe.

"This new disclosure completely changes our view of MBIA being a 'more conservative underwriter' relative to Ambac," the analyst said.

The CDO-squared deals guaranteed by MBIA are higher quality than Ambac's, but Zerbe said that probably won't matter much as subprime-mortgage losses continue to mount.

Rating agency Standard & Poor's recently estimated that MBIA's CDO losses could be 61% higher than Ambac's in a stressed housing market scenario, Zerbe said.

Warburg questions
Most bond insurers are now trying to boost capital to avoid losing crucial AAA ratings. Without such ratings, their business models may be imperiled. See full story.

MBIA unveiled an investment of up to $1 billion from private-equity firm Warburg Pincus on Dec. 10. See full story.

Late Thursday, MBIA said that its CDO-squared disclosures won't affect the deal because it told Warburg about the exposures before the agreement was signed.

The CDO-squared information was disclosed late Wednesday to provide investors with more detail on MBIA's multisector CDO portfolio. It doesn't disclose any additional CDO exposure.

The company said it hadn't disclosed this earlier because many of these transactions contain less than 25% direct U.S. residential mortgage-backed security collateral. MBIA shares gained 10 cents to $20.05 during after-hours trading Thursday.

Fitch warning
Fitch put the AAA ratings of MBIA's bond insurance units on Ratings Watch Negative, suggesting the agency may downgrade to AA+ within the next four to six weeks.

Fitch said it finished a review of MBIA's exposures recently and concluded that losses from its guarantees of CDOs, CDO-squared deals and mortgage-backed securities -- plus downgrades of some of those securities -- leave the company roughly $1 billion short of the excess capital needed to keep an AAA rating, under a stressed housing-market scenario.

MBIA needs to raise more capital or boost its capital cushion in other ways, in addition to the $1 billion commitment the insurer recently got from Warburg Pincus, Fitch explained.

"The $1 billion capital commitment from Warburg Pincus will likely increase MBIA's flexibility to engage in other capital enhancement measures in the weeks ahead," the rating agency said.

Alistair Barr is a reporter for MarketWatch in San Francisco.