Report on the Lehman-related Securities (9)

( II. Dissecting the ‘Piggybacked Structure’....... continued)

It should be noted that while most of the Lehman-related securities are fixed rate product, the
security (because of the inherent volatility) is designed to generated variable rate return. In
order to enable Lehman to benefit from the potential higher return without having to assume
the risks embedded in the synthetic CDO, Saphir would enter into swap agreement with
another Lehman-controlled entity (the ‘swap counterparty’) whereby return generated from
the portfolio would be paid by the former to the latter in exchange for a sum equivalent to the
interest payable to the victim investors. In other words, the victim investors of each series of
Lehman-related securities were asked to underwrite an extremely complicated portfolio of
derivatives for a meager return because they were not informed of the risk at the time of the
investment. The bulk of benefit flowing from the portfolio went to Lehman, secretively
through the hidden component in the ‘piggybacked structure’.

Although the swap between Saphir and the ‘swap counterparty’ is all within the control of
Lehman, Saphir had to use the money received from Pacific to purchase collateral in order to
give the arrangement the respectability in the eye of the more regulated world. After all, the
Saphir notes are subject to the relevant European regulations governing disclosure. With
more transparency, there are few anomalies. The exact opposite happens in Hong Kong. Such
latent sense of lawlessness, fostered by the frequent disregard of the law by the government,
encourages or even causes the fraudsters to conceive and implement the scam here.

The very contrived nature of this ‘piggybacked structured’ is also manifested in the
misstatement that the investors’ money was used to purchase the security as if it is something
of value. The security, as explained above, is also a credit-linked note embedded with a swap
arrangement between Saphir and another Lehman entity similar to a SPE. The swap
agreement is a private bilateral contract the value of which depends to a large measure on the
collateral selected by the parties to back up their mutual promises. In other words, to describe
the ‘security’ (i.e. Saphir notes) as ‘collateral’, which is what Pacific does in its prospectuses,
is a misstatement for the simple reason that there is ‘real collateral’ underlying the Saphir
notes. With regard to the Saphir notes series 2008-8, the ‘real collateral’ is USD61,000,000
Principal amount floating rate note issued by Landesbank Baden-Wurttemberg. It is to the
purchase of this ‘real collateral’ that the fund of investors of minibond series 12 has gone.
The existence of this ‘real collateral’ is kept hidden from the investors because the term
‘collateral’, together with its conceptual significance, has been misappropriated to apply to
the ‘hidden component’ (the Saphir note).

to be continued......
Extract From: "Exposure - the Truth About Lehman-HSBC Fraud"