Retired civil servant Coral Chan and her husband just wanted a little extra income to supplement their pensions.
So they sank $150,000 in savings into what looked like a safe investment: a bond — known as an equity-linked note — tied to blue-chip Hong Kong and Chinese stocks. If the stocks did well, Chan and her husband would get a generous interest payout. In the worst-case scenario, they might lose out on interest payments — but would end up holding some blue-chip shares.
Or so they thought. Their nest egg splattered in September, collateral damage in Wall Street's financial crisis.
The note that Chan had bought from ABN Amro bank had been created, distributed and managed by the Wall Street investment bank Lehman Bros. When Lehman sought bankruptcy-court protection in September, the note vanished into a black hole along with other, similar Lehman investment products. She doesn't know if she'll ever recover any of her money.
Chan, 55, has plenty of company. Lehman's meltdown has left victims across the Pacific Ocean. In Hong Kong alone, 43,700 people bought $2.6 billion worth of Lehman investment products, some of which might now be worthless.
"It's broken our hearts," Chan says.
The debacle has turned quiet retirees such as Chan into placard-waving protestors, claiming they were duped into making risky investments and demanding their money back — either from the banks that sold the investments or the governments that let them. Even in somnolent Singapore, hundreds of angry investors rallied at a public park on Nov. 1.
"The banks were telling lies," says Grace Lau, 53, a friend of Chan's who has nearly $130,000 tied up in Lehman investments. "We were persuaded that the blue-chip stocks were safe. We didn't know anything. We were like children."
The Lehman products included equity-linked notes and so-called mini-bonds that invested in complicated products, such as interest rate swaps and collateralized debt obligations. "It's almost gambling. It's highly risky," says Johannes Chan, a Hong Kong University law professor.
The weird twist: The problem isn't necessarily the underlying investment. The problem is that the issuer — Lehman Bros. — no longer exists. "The collaterals are still there, but no one can manage them any more," says Billy Mak, professor of finance at Hong Kong Baptist University.
Under public pressure, banks that sold the Lehman investments in Hong Kong have agreed to buy them back from investors. What they pay will be based on a formula devised by the accounting firm Ernst & Young. "It is too early to say how much" investors will get back, says Jasmine Yap, a spokeswoman for the Hong Kong Association of Banks. DBS, a Singapore-based bank that sold the Lehman products, has warned that some of the investments may be worthless.
The Hong Kong government also has agreed in some cases to pay for mediation or, failing that, binding arbitration between the banks and aggrieved investors. And Hong Kong securities regulators are considering creating a cooling-off period during which investors can back out of investment contracts if they have second thoughts.
Hong Kong Baptist's Mak says regulators in Singapore and Hong Kong took a relaxed attitude toward sales of the Lehman products because the two cities have been competing against each other to become the financial capital of Southeast Asia.
Johannes Chan, who is helping the Hong Kong Consumer Council bring legal cases against banks that misled investors, says bank employees were under intense pressure to meet quotas by selling products they didn't understand. "They found the most vulnerable customers," he says.
Grace Lau doesn't blame the ABN Amro "relationship manager" who nudged her into investing her savings into the equity-linked note: The woman was the daughter of a close friend and probably didn't understand the risks. ABN Amro — now part of the Royal Bank of Scotland — said in a statement that it "believes we classified these products appropriately as 'growth' investment products." The bank also said: "We treat all client concerns and complaints extremely seriously and will review and investigate each individual case thoroughly."
While waiting to see if they get their money back, Lau and Coral Chan are scrimping. Taking a break from a protest the other day, they shared a fast-food lunch to save money. Chan feels guilty because she talked her husband into making the ill-fated investment. At least, she says, "He has forgiven me."