Identifier
Created
Classification
Origin
08HONGKONG1925
2008-10-17 11:54:00
CONFIDENTIAL
Consulate Hong Kong
Cable title:  

HONG KONG GOVERNMENT PUSHES BANKS TO RESOLVE

Tags:  EFIN ECON HK 
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VZCZCXRO8071
RR RUEHGH
DE RUEHHK #1925/01 2911154
ZNY CCCCC ZZH
R 171154Z OCT 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6041
INFO RUEHBJ/AMEMBASSY BEIJING 2645
RUEHGP/AMEMBASSY SINGAPORE 3937
RUEHGZ/AMCONSUL GUANGZHOU 1427
RUEHGH/AMCONSUL SHANGHAI
RUEHIN/AIT TAIPEI 0073
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 001925 

SIPDIS

STATE FOR EAP/CM AND EEB/OMA; TREASURY FOR OASIA DOHNER AND
U/S MCCORMICK

E.O. 12958: DECL: 10/17/2033
TAGS: EFIN ECON HK
SUBJECT: HONG KONG GOVERNMENT PUSHES BANKS TO RESOLVE
LEHMAN MINIBOND CONTROVERSY

REF: HONG KONG 1757

Classified By: Acting Consul General Christopher J. Marut, Reasons 1.4
b/d

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 001925

SIPDIS

STATE FOR EAP/CM AND EEB/OMA; TREASURY FOR OASIA DOHNER AND
U/S MCCORMICK

E.O. 12958: DECL: 10/17/2033
TAGS: EFIN ECON HK
SUBJECT: HONG KONG GOVERNMENT PUSHES BANKS TO RESOLVE
LEHMAN MINIBOND CONTROVERSY

REF: HONG KONG 1757

Classified By: Acting Consul General Christopher J. Marut, Reasons 1.4
b/d


1. (C) Summary: Hong Kong government officials, in response
to recurring public demonstrations by angry purchasers of
Lehman "minibonds," have encouraged distributing commercial
banks to buy back these structured debt instruments at some
percentage of their face value. Many of the banks are
reluctant to do so before realistic valuations can be
determined, but face increasing official pressure to help the
government resolve this political problem. Political parties
in Hong Kong have jumped on the issue as they compete to
prove who can best represent the rights of the downtrodden
Hong Kong investor. End Summary.


2. (C) Comment: The plight of Lehman "minibond" purchasers
has all of the elements the Hong Kong press loves: poor
investors who bet their retirements on Lehman Bros. products;
heartless bankers who misled elderly and unsophisticated
purchasers to make a buck; hapless government officials who
failed to protect consumers; and increasingly public
government efforts at arm-twisting the banks into settling
with angry customers. Hong Kong government regulators are
investigating complaints of improper selling but these
efforts will take some time. Regulators are under pressure
from the Administration to quickly find a political way out
of the storm. The minibond crisis illustrates the Hong Kong
government's split personality: on one hand, officials
consistently reaffirm their commitment to market principles
and their faith in Hong Kong regulatory institutions. On the
other, the unelected and poll-phobic government abandons its
faith in regulatory procedures and pressures banks to pay up
to help defuse a hot-button political issue. End Comment.

==========================================
Lehman Bankruptcy Hits Hong Kong Investors
==========================================


3. (C) Lehman Bros., bankruptcy has become a political
problem in Hong Kong as investors in Lehman Bros.-issued
"minibonds" (actually synthetic CDOs tied to price movements
of selected international stocks and other assets) accuse

banks of misinforming buyers of the risks and pressure the
Hong Kong government to step in. An estimated 43,000 Hong
Kong residents may have invested as much as US$ 2.6 billion
(HKD 20.17 billion) in Lehman Bros. products, which were
primarily marketed by retail banks. HKMA officials say over
33,000 of these investors purchased US$ 1.5 billion (HKD
11.25 billion) worth of minibonds. Retail investors have
organized to demonstrate in front of banks and are working
with Hong Kong political parties to demand full compensation.
(Reftel)


4. (U) HKMA is working to investigate over 9,000 complaints
of improper selling by banks, many collected and forwarded by
Hong Kong political parties eager to stake out territory as
protectors of the people. HKMA's Banking Policy division has
reassigned one-third of its staff and hired external
contractors from Hong Kong accounting firms to help process
complaints. Hong Kong regulations require financial
intermediaries selling investment products, including both
banks and securities firms, to accurately explain products
and the risks they entail. HKMA has issued guidance to banks
(March 2006) advising them to take special care when
explaining investment products to the elderly.

============================================= ==
HKMA Assesses Complaints, Tries to Value Assets
============================================= ==


5. (C) HKMA Executive Director Arthur Yuen rejected
allegations that HKMA and SFC had failed to provide proper
supervision of financial intermediaries. While some cases of
improper selling undoubtedly exist, most complaints are
politically driven efforts to recoup losses on risky
investments, he said. HKMA has responsibility to ensure that
banks have proper internal controls to make improper selling
difficult and to meet out discipline if investigations find
evidence of inappropriate activity. Yuan offered that
investigations are likely to take at least several months.
Adjudicators are first determining whether filed complaints

HONG KONG 00001925 002 OF 003


appear to have merit. He estimated 20-25 percent will be
dismissed for not showing sufficient cause to warrant
additional investigation. Of the remainder, the vast
majority will also prove baseless, he said. Those banks that
are found to have misled or misinformed investors will face
fines and other disciplinary measures.


6. (U) The HKMA has been working with the Secretary for
Financial Services and the Treasury to urge banks and the
minibond trustees (HSBC is the major trustee) to value the
minibonds' underlying assets. While Lehman Bros. is
bankrupt, the assets behind the minibonds are still worth
something. Banks have been reluctant to try to value these
assets because their worth depends on market prices and
liquidity. In the current market, immediate sale would
result in severely limited recovery. A more protracted
unwinding could improve the ultimate value and result in
additional funds to return to investors.


7. (C) Undersecretary for Finance and Treasury Julia Leung
estimated that 10 percent of minibonds will ultimately prove
worthless, while 80 percent of the minibonds will return 60
to 70 percent of their face value. These estimates have been
roundly criticized by banks, who argue it is impossible to
properly value the underlying assets in the current market.
Investors have seized on these numbers, which have become a
floor in their demands for bank compensation.

============================================= ====
HK Pols Show Compassion while HKG Pressures Banks
============================================= ====


8. (U) Investors have been regularly staging media-intensive
demonstrations at Hong Kong government offices, HKMA, LegCo
and banks, with the help of Hong Kong political parties. The
Democratic Party was first to seize on the issue, followed
quickly by the pro-Beijing Democratic Alliance for the
Betterment of Hong Kong (DAB) and Civic Party. Party leaders
from all three have advised and accompanied investors to
meetings with bank officials to demand compensation.
Mirroring the government's unspecified grounds to force a
buy-back on bankers, the politicians are making moral rather
than regulatory appeals for justice, albeit with increasing
caution as evidence of actual regulatory violations has yet
to surface. Hundreds of protesters took to the streets on
the weekends following Lehman's collapse. While the number
of protesters has fallen in recent days, the intensity has
increased, with demonstrators scuffling with police on
October 8, as they demanded full compensation from the banks.



9. (U) On October 6, Financial Secretary John Tsang, HKMA
Chief Executive Joseph Yam, and Secretary for Financial
Services and the Treasury invited distributing banks and
brokerages to discuss ways to help investors. The government
proposed that banks repurchase the minibonds at current
market value and return the funds to investors and reportedly
gave them one week to develop a common valuation model and
buy-back plan. Chief Executive Donald Tsang urged banks to
quickly take up the proposal.

===========================================
Banks Offer to Pay if Guilty of Mis-selling
===========================================


10. (U) HKMA's Yam and SFC Chairman Martin Wheatley appeared
in the Legislative Council on October 13 to answer questions
regarding regulator oversight of banks and securities firms
engaged in selling Lehman Bros. products. They rejected
charges that they had failed to properly monitor banks
selling high-risk products, and put the onus back on the
banks. "If banks followed all the SFC and HKMA regulations,
investors would have sufficient understanding of the risk.
The problem is whether banks followed all the regulations,"
said Yam. He urged banks found to have misled investors to
offer compensation. Several banks have publicly agreed to do
just that, if they are found to have misinformed clients.
DBS, Citibank and Citic Kawah have all announced they will
pay if their staff misrepresented products to consumers.


11. (U) The Chairman of the Hong Kong Association of Banks,
He Guangbei, told the press October 10 that banks in Hong
Kong are willing to work on the government's proposal to

HONG KONG 00001925 003 OF 003


compensate investors who have lost money. He offered that
association members hoped to quickly appoint a financial
advisor to help to value the assets underlying the minibonds
and to set up a compensation package. But Chief Executive
Tsang, in response to questions following his annual Policy
Address to LegCo on October 15, said the banks need to move
faster. He noted that the government's one week deadline for
banks to announce their compensation plan had passed and
demanded they reply by the end of the week. In addition,
Tsang promised that the government would support a fund for
citizens to pursue joint lawsuits against banks found to have
violated Hong Kong regulations.
MARUT