Lehman Brothers Minibond saga : the products



Singapore Infopedia

Background

The Lehman Brothers Minibond saga arose from the company’s bankruptcy filing in September 2008 and affected several structured investment products linked to the bank.1 Investors were outraged when they discovered that the bank’s collapse could cause them to lose all or most of the money they had invested in these products.2 Media reports revealed how complex these products were and raised questions about their suitability for the mass market.3 Many of the affected investors claimed that they did not fully understand the risks involved and that the distributors had misrepresented and mis-sold the products.4

Background
Structured products made their debut in Singapore’s retail investment market in 1999 and quickly became the fastest-growing segment of the financial services industry.5 Financial institutions offered an increasing array of such products to cater to growing demand.6 Over the years, the products offered became more complex such that even trained financial advisers had difficulty comprehending how they worked.7 Nonetheless, retail investors flocked to these products without fully understanding them, drawn by the attractive coupons, which were much higher than fixed deposit rates.8 It was estimated that about S$3 billion worth of structured products were sold in Singapore in 2007, the year before Lehman Brothers’ collapse brought the market for these products to a standstill.9


The affected products
Offered between April 2006 and July 2008, the products in the Minibond saga were the Minibond Notes programme (issued in nine series: Series 1, 2, 3, 5, 6, 7, 8, 9 and 10),10 High Notes 5,11 Jubilee Series 3 LinkEarner Notes,12 and Pinnacle Notes Series 9 and 10.13 Ten financial institutions in Singapore distributed the notes.14

The notes belong to a category of structured financial instruments called first-to-default credit-linked notes.15 They pay the investor a stream of interest/coupon at regular intervals until the maturity date.16 When the notes mature, the investor will receive either the principal or an amount calculated based on a specific formula.17 However, they do not guarantee the principal investment amount.18

The returns of such credit-linked notes are linked to the credit performance of a portfolio of reference entities, which are often reputable companies with good credit ratings.19 If one of these reference entities experiences a credit event (e.g., bankruptcy or failure to make debt repayments),20 the note issuer will sell the underlying assets (purchased using proceeds from the note issue) and use the recovered value to meet its various payment obligations.21 Early termination of the notes may also be triggered by a drastic decline in the market value of the underlying assets, which usually include collateralised debt obligations.22

These notes typically involve a credit default swap agreement between the note issuer and another entity referred to as the swap counterparty.23 Throughout the note’s tenor (which could be up to ten years), the two parties exchange a series of payments – the note issuer channels the returns from the underlying assets to the swap counterparty in exchange for a series of payments that it then uses to pay the note holders.24 If a credit event occurs, the swap counterparty will be paid before the note holders.25

Lehman Brothers, which arranged the Minibond programme, was the swap counterparty for the notes.25 The Asset, a Hong Kong-based financial magazine, named Minibond Notes as the best credit structured deal in 2007.27 Each series had six or seven reference entities, which differed between the series.28 For example, the first series referenced American Express, Citigroup, DBS Bank, JPMorgan Chase & Co, Singapore Telecommunications (Singtel) and Standard Chartered Bank, but the last two series referenced Aviva Public Limited Company (PLC), HSBC Bank PLC, Prudential PLC, Singtel, Malaysia and China.29

Unlike in the Minibond programme, Lehman Brothers was a reference entity in High Notes 5 and Jubilee Series 3 LinkEarner Notes.30 DBS Bank was the arranger and the swap counterparty for High Notes 5, while Merrill Lynch played the same roles for Jubilee Series 3 LinkEarner Notes.31 Besides Lehman Brothers, there were seven other reference entities in High Notes 5, including Goldman Sachs, Macquarie Bank, Merrill Lynch and Morgan Stanley.32 Jubilee Series 3 LinkEarner Notes had four other reference entities, namely, Macquarie Bank, Morgan Stanley, Oversea-Chinese Banking Corporation (better known as OCBC Bank) and United Overseas Bank.33

In the case of Pinnacle Notes Series 9 and 10, Lehman Brothers was included in the underlying portfolio of collateralised debt obligations.34 The notes were arranged by Morgan Stanley, which was also the swap counterparty.35 The reference entities were SingTel, Temasek Holdings, Australia, Hong Kong and Singapore.36

Minibond Notes, Jubilee Series 3 LinkEarner Notes and Pinnacle Notes Series 9 and 10 were issued by special purpose vehicles created solely for issuing the notes, whereas High Notes 5 was issued by DBS Bank.37 These notes offered interest rates of at least 4 percent per annum with tenors of between five and seven years.38 Minimum investment sums ranged from S$5,000 to S$25,000, though many people invested much more.39 In total, about 10,000 retail investors placed over S$500 million in these notes.40 Many of these investors were retired, elderly or middle-aged individuals who invested most or all their life savings.41



Author

Valerie Chew



References
1. Gabriel Chen, “Structured Products, Anyone?” Straits Times, 7 December 2008, 36. (From NewspaperSG)
2. K. Tan, “Personal Wealth: Messy End to Structured Products,” Edge Singapore (29 September 2008). (Call no. RSING 338.7095957 ES)
3. Chen, “Structured Products, Anyone?
4. Tan, “Personal Wealth.”
5. Chen, “Structured Products, Anyone?”; Lorna Tan, “Coming to Terms with Risks,” Straits Times, 28 September 2008, 27. (From NewspaperSG)
6. Chen, “Structured Products, Anyone?
7. Genevieve Cua, “What Are Structured Notes?” Business Times, 23 August 2006, 32 (From NewspaperSG); Tan, “Personal Wealth.”
8. Cua, “What Are Structured Notes?
9. Chen, “Structured Products, Anyone?
10. “Investigation Report on the Sale and Marketing of Structured Notes Linked to Lehman Brothers,” Monetary Authority of Singapore, 7 July 2009, I; Monetary Authority of Singapore, “MAS Welcomes Announcement of the Distribution of the Recovery Values of the Minibond Notes,” press release, 3 February 2010.
11. “Investigation Report,” i.
12. “Investigation Report,” i.
13. “Investigation Report,” i.
14. “Investigation Report,” ii.
15. Chen, “Structured Products, Anyone?
16. Oliver Chen and Anand Srinivasan, “Which Credit Products Are Suited to the Masses?,” Straits Times, 29 October 2008, 22. (From NewspaperSG)
17. Francis Chan, “Credit-Linked Notes May Be Worthless,” Straits Times, 14 November 2008, 6. (From NewspaperSG)
18. Chan, “Credit-Linked Notes May Be Worthless.” 
19. Cua, “What Are Structured Notes?” 
20. Chen, “Structured Products, Anyone?
21. Tan, “Personal Wealth.”
22. Tan, “Personal Wealth.”
23. “Investigation Report,” 2; Christopher C.H. Chen, “Product Due Diligence and the Suitability of Minibonds: Taking the Benefit of Hindsight,” Singapore Journal of Legal Studies, 2011: 309–29. (From JSTOR via NLB’s eResources website)
24. “Investigation Report,” 2; Chen, “Product Due Diligence and the Suitability of Minibonds.”
25. “Investigation Report,” 2; Chen, “Product Due Diligence and the Suitability of Minibonds.”
26. Siow Li Sen, “Investors Fret over Lehman’s Minibonds,” Business Times, 17 September 2008, 1 (From NewspaperSG); Tan, “Personal Wealth.”
27. Tan Dawn Wei and Francis Chan, “When It Happened, I Was Shocked’,” Straits Times, 19 October 2008, 8. (From NewspaperSG)
28. Cua, “What Are Structured Notes?” 
29. Genevieve Cua, “Lehman Brothers Launches Credit-Linked Note,” Business Times, 4 April 2006, 6; Lawrence Loh, “Questions Unanswered: Minibonds Fiasco,” Straits Times, 14 October 2008, 24 (From NewspaperSG); Chen, “Product Due Diligence and the Suitability of Minibonds.”
30. “Investigation Report,” 3.
31. Francis Chan, “DBS High Notes Investors at Risk,” Straits Times, 18 September 2008 (From NewspaperSG); “Investigation Report,” 1.
32. Tan Dawn Wei and Francis Chan, “When It Happened, I Was Shocked.” 
33. Karen Wong, “$200,000 Insurance Payout for Paralysed Man at Risk,” New Paper, 25 October 2008, 2. (From NewspaperSG)
34. “Investigation Report,” 24; Francis Chan, “Bad News for Pinnacle Buyers,” Straits Times, 15 November 2008, 3. (From NewspaperSG)
35. Chan, “Bad News for Pinnacle Buyers.”
36. Chan, “Credit-Linked Notes May Be Worthless.” 
37. Chan, “DBS High Notes Investors at Risk.
38. Chan, “DBS High Notes Investors at Risk;” Cua, “Lehman Brothers Launches Credit-Linked Note.”
39. Tan and Chan, “When It Happened, I Was Shocked’.” 
40. Tan and Chan, “When It Happened, I Was Shocked.” 
41. Karen P. Y. Lai, “The Lehman Minibonds Crisis and Financialisation of Investor Subjects in Singapore,” Area 45, no. 3 (2013): 273–82. (From JSTOR via NLB’s eResources website)



Further resource
Steffen Tolle et al., Structured Products in Wealth Management (Singapore: John Wiley & Sons (Asia), 2008). (Call no. RBUS 332.6 STR)




The information in this article is valid as of October 2023 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.


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