Report on the Lehman-related Securities (4)

(1. Introduction ....... continued)

There is evidence showing that from 2003 to 2008 the HKMA had kept on asking the banks
to adhere to the codes, presumably without any sign of success despite repeated attempts year
after year. No regulator can perform its statutory duties by exhortation alone. We have no
reason to believe that the HKMA has ever been so hamstrung during the material time as to
render it impotent to police the banks. This being the case, one cannot help wondering why
HKMA should tolerate the banks to indulge in malpractices inclusive of taking no heed of the
warnings from the regulator. Hong Kong has a shameful history of pervasive corruption on a
massive scale. We should not entertain the implausible and groundless assertion of the
HKMA that it has performed its duties diligently. Deeds usually speak louder than words, and
this is truer in law enforcement than in other circumstances. The fact that HKMA is incapable
of moving beyond mere words speaks volume of the insincerity of its statements.

More in-depth analysis on the responsibilities of the HKMA and SFC in the scam will appear
in the pages to follow. In Chapter II, the ‘piggybacked structure’ will be explained in greater
detail in order to prepare the uninitiated for the following two chapters where the crucial
questions relating to the total regulatory failure will be discussed.

In sum, the Lehman-related securities are not caused by the recent credit market crisis, or the
‘mis-selling’, or the design of the ‘piggybacked structure’ alone. Rather it is the banks
implicated in the scam together with the ‘regulatory capture’ that bring about the tens of
thousands of tragic stories of the victims. Looking further afield, one could justifiably say
that the scam is symptomatic of the socio-political malaises that enable the banks to disregard
the regulators, and in turn the regulators to disregard the public. What is outrageous is not
only that the regulators failed in their statutory duties over the last few years, but also their
persistent refusal to respond to reasonable requests, whether they are for information or
action, from the victims of this scam. These are the grounds on which we found our
accusation of abdication against these two bodies.

Extract From: "Exposure - the Truth About Lehman-HSBC Fraud"

Catastrophic Effect of Synthetic CDO

The article in the Hedge Systems revealed how damaging Synthetic CDO can be.

Many Minibond collateral were Synthetic CDO and there were no details were disclosed on the Synthetic CDO other than it was a 'AAA-rated (synthetic CDO)'. No information was provided on the number of reference entities, their ratings, the rules for the default-event, etc. 

Banks are expert in buy/selling CDO & CDS & Synthetic CDO & Conventional bonds. From their many years experiences & expertise, Banks SHOULD KNOW that AAA-rated Synthetic CDO is different from AAA-rated conventional bonds. Further,  banks SHOULD KNOW that AAA-rated CDO (in the upfront marketing material) was referring to Synthetic CDO and not referring to the CASH flow CDO. 

While HKMA Mr. Yam was defending banks in legco regarding the disclosure of CDO collateral, he casually forgot that the Minibond CDO collateral was in fact Synthetic CDO, not the Cash-Flow CDO. The two seems sharing similar naming "CDO", but the exact prefix "Cash Flow" (CDO) and the "Synthetic" (CDO) showed their different risk profile. 

Quote from the "Catastrophic Effect of Synthetic CDO":

[ " There is a major difference of Synthesis CDO and Cash Flow CDO.

In the case of Cash flow CDO, managers need purchase the assets first. Then it securitized as CDO to sell investors. ...

Manage of CDO must hold equity piece of  CDO. 

In case of Synthetic CDO, Synthetic CDOs are structured vehicles that use credit derivatives (CDS) to achieve the same credit-risk transfer as cash flow CDOs,  without physically transferring the assets. 

The risk is typically transferred to the investors by the entity holding the physical assets."

]