Justice Bao Kong: MAS speaks up- What investors need to beware

In today’s Straits Times newspaper, MAS said it will review the way complicated investments are marketed and sold to investors. That will include risk rating, clearer product labelling and stronger suitability requirements.

MP Cynthia Phua also suggested such financial products should be graded and offered to investors who can fully understand the underlying risks.

OK, the above is what that has been printed in the newspapers. So, what is behind the scenes that the ordinary man in the street need to take note of? In www.baokong.wordpress.com, we explain what the layman needs to know:

Firstly, financial institutions are there to make a PROFIT- their FIRST priority is to MAKE MONEY, everything else is secondary. Take their ‘customers first’ marketing with a pinch of salt. If you do not buy investments and insist on leaving money in fix deposits, you can be assured you won’t be their ‘first rate’ customers. If they tell the whole truth to customers, nobody would buy the products, and everyone will leave their money in fixed deposits or under their pillow.

So what these institutions will do is they will put in place a very good system of reporting to MAS that they have forms and brochures that clearly states the risk of each and every product (which comes in small print and SEVERAL pages), that they give AUDITED training to all their sales staff to ensure that they COMMUNICATE ALL RISKS to customers, and they make their sales staff acknowledge and SIGN on the training forms so that if there is any customer complaints, the institutions, by reasonable man’s standards, have certain immunity as they can prove that by way of the above systems, they have done a reasonable man’s standards in communicating the inherent risks to customers.

So this places the onus on the sales staff or bankers, who are given very high ‘revenue targets’ which they have to meet in order to keep their high paying jobs ( In banking, sales staff remuneration are tied to the products they sell – look out for Justice Bao Kong’s future blogs, his servants will elaborate in greater detail how the bankers’ remuneration works, and you will have a better idea why your bankers don’t tell you the whole truth). These poor bankers are coerced to sign on forms provided by their financial institutions which require them ‘to communicate the whole product risks, structure and other terms and conditions’ clearly to customers and they will be LIABLE for any customer complaints of misrepresentation. These poor souls are facing a dilemma: If they tell the whole truth to customers, it is likely they will not get the sale, and thus they do not achieve their targets and they get fired. So, what naturally happens is that bankers will tell selective truths and run through quickly on the ‘risks’ area and cover them up with the potential of returns, etc such that they did communicate the ‘inherent risks’ to customers, albeit not clearly, and customers get the impression of the ‘potential returns’ but not registering the full risks involved due to the clever presentation by the sales staff. Thus, the turnover rate of bankers are extremely high: The only way these institutions can maintain their high revenue targets is to ‘hire and fire’. Sales staff initially start off achieving their targets, and until a few months later, when their customers have no more money to buy investment products, they get fired and new bankers are hired and they bring in their portfolio of customers, sell products, no more money left to buy, bankers get fired, and the cycle goes on. Just ask any investor on the street how many bankers have they had within the same bank in the period of two years? 6 bankers? or 8? That explains it all.

In summary, when planning to do investments, always take responsibility to do research and speak to friends who have experience. The government can only do so much, the onus is on oneself to protect one’s assets and investments. This is the world of capitalism, every man for himself, profits come before compassion. And this is why we created www.baokong.wordpress.com, to help the man in the street understand more and not be taken advantage by hungry capitalistic corporations.

Your humble servantsource: Singapore Straits Times

Justice Bao Kong: Sub Prime: Additional Information

I have attached a video (source: Youtube) which a mortgage broker spills the beans on fraudulent loan builders whom he says causes the sub prime mess. His testimonial would relate to events prior to the banks and brokers packaging the ABS into CDOs and reselling to various financial institutions and investors.

Your humble servant.

If you are interested in finding more of Singapore, you can find out more by clicking here .

Justice Bao Kong: Subprime: What your banker did NOT tell you

Much have happened in the recent weeks in the financial circles. The origin of the financial turmoil is from the American housing market, where a recipe of cheap money then and the American Dream of house ownership coupled with bankers and mortgage brokers too keen to achieve their sales targets resulted in today’s financial mess. How then, does this result in the failure of 2 of US largest investment banks and the downgrade of the last 2 to commercial banks? How did Bear Stearns and Lehman Brothers go bankrupt? How did AIG, the largest insurer in America go illiquid?

Around midyear 2003, US Fed Fund Rate was a paltry 1% (Source: http://www.wsjprimerate.us/fedfundsrate/federal_funds_rate_history.htm), creating cheap money and liquidity. Previously, it was the bond insurers and experienced traditional investors who maintained a standard of risk management by placing a premium on the loans based on the seller’s credit worthiness or track record. But due to the growing competition and appetite of these mortgage brokers, more and more brokers are creating ’synthetic ABS’ or CDOs, collateralised debt obligations. The tight spreads on triple B ABS squeezed the traditional bond insurers out of the market, leaving  the subprime securitisation market to the CDO sector.

The problem here is that when brokers package these CDOs, they do not assume the inherent risks involved in the underlying ABS- It is the investors that bear the credit risk. Renowned credit rating agencies rate these CDOs based on the underwriters, ie the mortgage broker or the banks, and they generally obtain very good credit ratings, and they may not rate the underlying asset which are the slices of subprime securities which are difficult to assess due to the intricate layers of packaging.

So, now comes the important part: What your bankers DID NOT tell you:

When investors, especially retirees who invested their life savings, 401k, etc into such structured products, ie minibonds, etc, they are usually not told the whole story. In fact, the name of the product is already misleading. When laypeople hear the word ‘minibonds’ they were given the impression they are buying a double A rating bond linked to the huge investment bank or corporation. What the salesperson may not tell you is that this CDO product is also linked to hundreds of ABS. aka, sub prime securities which are not rated and any credit events occurring on these securities could result in loss of capital.

The salesperson cannot entirely be blamed too. He is also working for a living, and he has revenue targets set by his bank and he will be fired if he does not meet his targets. If the salesperson tells the whole truth to the customer, he will lose the sale and face the possibility of being fired.

Banks make their sales staff sign on declaration forms that on one hand, require their bankers to explain ALL the risks related to the products to their customers, and yet on the other hand, will fire them if they do not achieve their sales targets. This is a fantastic way of protecting the bank themselves while relegating the blame to the sales person if anything goes wrong.  There was an article written by a kind certified public accountant to Monetory Authority of Singapore (MAS) but according to the article, not much has been addressed- I have attached the letter for your reference (source: Today Newspaper)

Why do I know so much about banking products? Because I was a former banker, and I have been through it all, and it is time to share with the masses all that is happening behind the scenes, and share with the man on the street things that your bankers do not tell you.

its way past 2am, and I am very tired, but I make this effort to share with the community what I already know to benefit everyone else.

All comments and questions are welcomed. Thank you.

Your humble servant.

(Source: Today Newspaper)

Justice Bao Kong: To serve and to protect, To help the poor and to uphold justice

The mission of this website are to :

* disseminate information with the aim of educating and helping the masses and improving their lives

* Assist aggrieved individuals, who have no means of redress, by garnering public support.

In order to achieve the above, we will be posting articles regularly and we hope to reach out to as many followers as possible so as to ensure our mission can be effectively carried out.