Despite massive redemption pressure last week, Mega International Investment Trust Co avoided closing its NT$36.6 billion (US$1.14 billion) Mega Diamond Bond Fund after its parent Mega Financial Holding Co promised to fully back debt securities and absorb potential losses.
The worsening US credit crisis added to redemption pressure for the Mega fund, which held NT$939.2 million in asset-backed commercial paper (ABCP) linked to the bankrupt Lehman Brothers Holdings Inc.
In an effort to create positive market sentiment, the Securities Investment Trust and Consulting Association said last week that no other Taiwanese mutual funds were linked to Lehman Brothers’ bond holdings. But the financial regulator, banks and investors should not be complacent.
The problem is not confined only to ABCP, but extends to many other popular financial products.
Since the US subprime mortgage crisis, we have seen sizable write-downs by many local banks on their subprime-related investments in collateralized debt obligations, collateralized bond obligations and structured investment vehicles.
Retail investors did not fare well either because they often misunderstood or were misled by their banks about the financial products they were purchasing.
For years, Wall Street brokerages and investment banks such as Lehman Brothers have introduced mutual funds to the market and attracted retail investors with high-return structured products, which are fixed income instruments with returns tracking the movements of currencies, interest rates, securities or commodities.
Despite their potential high returns, investors often don’t take into account the risks these products carry.
Take structured notes as an example: Taiwanese investors had placed an aggregate sum of NT$882.8 billion in structured notes at the end of this year’s second quarter.
But, without adequate information from sales agents regarding the possible risks, there were 689 complaints lodged by local investors against banks over structured note investments totaling NT$2.35 billion between July last year and this April, Financial Supervisory Commission’s (FSC) data showed. Four hundred people who saw their investments in structured notes turn sour have formed an association and are considering taking legal action.
On Friday, the FSC said it had coordinated with the investment trust association, the Bankers’ Association of the Republic of China and major commercial banks to halt management fees on structured products issued or guaranteed by Lehman Brothers.
Compared with what regulators in Hong Kong and Singapore said last week — that they would take action to protect individual investors from being affected by Lehman Brothers’ collapse — this is pathetic.
The FSC should conduct a systematic and comprehensive review of financial regulations on structured products sold in this country.
The financial regulator should also investigate any banks accused of misleading investors while selling structured products and other derivatives.
Most importantly, the FSC should make it crystal clear that justice will be served if banks are found to have misinformed investors. Otherwise, with the current volatility of local and global financial markets, it should begin to prepare for the worst.
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