In the third part of our series on how the collapse of Lehman Brothers sparked a global financial meltdown, we examine the impact of the meltdown on Asian investors.
Yu Lia Chun, a retired hospital orderly in Hong Kong, never heard of Lehman Brothers Holdings before she got a call last September from her banker.
"He said, 'Did you hear the news? Something has happened to Lehman'," Yu, 66, said in June. "I didn't get it."
Yu thought her money was in a savings account. She didn't know she had lent it to a bankrupt American securities firm. Eventually, she found out that her HK$1.2 million ($222,000) nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.
"There is no way a person like me could understand any of this," Yu said, dabbing her eyes with a tissue in a coffee shop in Hong Kong's financial district. "Sometimes I feel like jumping off a building."
What hit Yu and her family was a tidal wave triggered halfway around the world by the biggest bankruptcy in United State history. The September 15, 2008, collapse of Lehman, with $613 billion in liabilities, had unforeseen and far-flung consequences that devastated those, like Yu, who didn't know their fates were tied to the New York-based investment bank.
The chief operating officer of a private-equity firm in London jumped in front of a train because he blamed himself for leaving the company's money in a Lehman account, according to a coroner's report. The Israeli managers of a hotel construction project on the island of West Caicos, northeast of Cuba, were taken hostage by Chinese workers when a Lehman loan didn't materialise and wages weren't paid. In Hong Kong, Yu and thousands of others who had invested in Lehman products camped out in the rain, thumping drums and chanting, "Give us our money back."
The realisation that a US securities firm so woven into the financial system couldn't pay its debts radiated out from New York, panicking investors around the world. It was a scenario that former International Monetary Fund chief economist Simon H. Johnson likened to Kurt Vonnegut jnr's novel Cat's Cradle, in which a single crystal of the fictitious substance ice-nine hardens all the planet's water.
The freezing of global credit markets after Lehman's demise began with professionals who traded commercial paper in New York. They were the first to feel the chill when the Reserve Primary Fund, the oldest money market fund, was inundated with requests for redemptions and seized up hours after the bankruptcy filing. The $785 million that Reserve had lent to Lehman was deemed worthless by 4pm the next day.
The US responded within a week to guarantee money markets and bank-to-bank lending. Within a month, Congress agreed to spend $700 billion to prop up banks under the Troubled Asset Relief Programme, the Federal Deposit Insurance Corporation guaranteed new bank debt, and Federal Reserve lending to financial institutions ballooned by $1 trillion.
Those programmes, which succeeded in stemming the panic, remain in place. What they didn't do was save Yu and thousands of other investors who had bought equity-linked notes or so-called minibonds connected to Lehman.
Equity-linked notes combine attributes of both bonds and stock by investing part of the proceeds in share options and the remainder in fixed income. Minibonds are custom-made securities linked to the creditworthiness of companies, backed by collateralised-debt obligations and sold in denominations of $5000. They functioned like credit-default swaps in reverse, where the investor stands to lose his principal when the firm named in the note can't pay its debts.
Yu, a mother of six who emigrated from mainland China in 1962, didn't have a chance, said Joseph Stiglitz, a Columbia University economics professor who won a Nobel Prize for his work on the effect of unequal access to information in financial markets.
"As securities got more complex, the opportunities for gaming, to the disadvantage of ordinary people, increased," Stiglitz said. "Complexity opened up new venues for information asymmetry, which banks exploited."
Asia became Lehman's highest growth region in 2007, taking in more than $3.1 billion in revenue, or 16 per cent of the firm's business. Yu said she went to an export trade show in Hong Kong two years ago and met Chow Chi Chung, a salesman for Amsterdam-based ABN Amro Holding NV. He offered her a better return on her savings if she switched banks, so she did.
A month later, Yu said Chow called her to say he had a new product that could return as much as 20 per cent a year because it was linked to the stock performance of three large Chinese companies - China Communications Construction, China Merchants Bank and Ping An Insurance.
Yu said she didn't read the fine print, trusting Chow when he told her she couldn't lose her principal. Had she understood the prospectus she would have discovered that she had essentially bought three call options - contracts that would capture gains if the shares of the three companies rose by a certain amount - coupled with the equivalent of a Lehman corporate bond. If Lehman defaulted, her money would be gone.
ABN Amro, now part of Edinburgh-based Royal Bank of Scotland Group, recruited Yu to sell the same product to her family, giving her a cash bonus of $155 for each person who signed up, she said. Chow couldn't be located, and Yuk Min Hui, a spokeswoman for RBS, said that if the bank determined that "sales processes and guidelines were not properly followed" it would offer "appropriate remedies".
Only a small number of investors fall into this category, she said.
There are 873 issues of such Lehman equity-linked structured notes outstanding with a combined face value of about $8.7 billion, all in default, according to data compiled by Bloomberg. Bonds were denominated in pounds, Swiss francs and Hungarian forint, as well as Australian and Hong Kong dollars.
Banks also sold $1.8 billion of Lehman minibonds to an estimated 43,000 investors in Hong Kong, where the notes were first marketed in 2003, the Hong Kong Monetary Authority said. The biggest seller was BOC Hong Kong (Holdings), a unit of Beijing-based Bank of China.
Sun Kwan, a 58-year-old retired parks worker, also bought Lehman minibonds. He stood outside the I.M. Pei-designed Hong Kong headquarters of the Bank of China in June, along with Yu and 51 other protesters, banging a chipped red drum with a stick every two seconds. A sign around his neck read: "The Bank of China is a hooker. Give me back my money earned with blood and sweat."
Sun, who has a high school education, invested about HK$285,000 in Lehman Minibond Series 12 notes, sold to him by BOC Hong Kong, which paid about 4 per cent interest a year. As an incentive, he was given $26 in supermarket coupons.
"It's all gone," Sun said. "I almost wanted to kill myself. I've been crying for months, even though I am a man."
Angel Yip, a spokeswoman for BOC Hong Kong, said "we understand and sympathise with customers" who lost money as a result of the Lehman collapse.
She said advertisements and prospectuses distributed by the bank "contained a detailed description of the structure and risks" of the investments.
In July, 16 retail banks, including BOC Hong Kong, offered to repay minibond investors at least 60 cents on the dollar, a deal brokered by the city's securities regulator that would amount to $813 million. About two-thirds of eligible noteholders accepted the offer, the Hong Kong Monetary Authority said. Sun said he hadn't yet made up his mind.
"The compensation offer is totally unfair and based on groundless calculations," Sun said.
"If we have to accept it eventually, it'll be because we've exhausted all other means."
- BLOOMBERG
