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Thursday, September 18, 2008

DBS High Notes investors at risk

Bank warns they may lose entire stake in Lehman-linked product
By Francis Chan

SOME local investors of a product linked to bankrupt investment giant Lehman Brothers have received late-night phone calls from DBS Bank warning them that their entire stake may be wiped out. The investors have their cash in a product called DBS High Notes 5 that the bank offered wealthier clients last year. It came with a promised annual return of about 5 per cent.

But Lehman's collapse on Monday means the product will be unwound and investors may only get a portion of their investment back - or none at all.

One 52-year-old customer told The Straits Times: 'I received a call from my relationship manager late Tuesday night. He told me investment may amount to zero.' The man had invested $50,000 - savings he had earmarked for retirement.

A customer in her late 40s said: 'My relationship manager called and told me to be prepared to receive a letter from the bank...[it] would say something to the effect that my investments in products like High Notes 5 may be totally gone.' She invested $50,000 and US$30,000 (S$43,000) in two separate transactions.

Investors are mostly clients of DBS's priority banking unit, DBS Treasures.

The product - DBS High Notes 5 - is a 5-1/2 year structured product linked to eight underlying shares, including Goldman Sachs, Morgan Stanley, Merrill Lynch, Macquarie Bank and Lehman.

Customers who invested in Notes 5 said they were sold on the relatively high 5 per cent annual payout by DBS. But now they just want their money back. 'What we do not understand is: How can the fall of one bank cause our funds to just vanish when there are seven other stocks within the product that are still trading?' said a man whose elderly aunt invested $50,000 in DBS High Notes 5.

According to a person familiar with the matter, the largest single investment made on High Notes 5 was $2 million, although this could not be verified by DBS.

DBS confirmed that it took immediate action to notify customers once it learned of Lehman's chapter 11 bankruptcy filing.

'As soon as the news broke we immediately started our retail investor customer base,' the bank said in an e-mail reply to The Straits Times. 'We are very concerned and understand the anxieties our customers face as they wonder what will become of their hard-earned money.'

DBS said the Lehman collapse has triggered a 'credit event' and the bank called for a redemption of the notes on Monday. It said unwinding of the product has begun and it will be at least 30 business days before clients learn of the final payout. But DBS also confirmed that investors in High Notes 5 may - 'in the worst-case scenario' - not get back their entire principal amount invested.

The product's prospectus also indicated that in a credit event such as bankruptcy, the notes 'will be terminated and the investor will receive zero payout'.

The bank said the product does not contain a guarantee that the principal will be protected. It also told The Straits Times it would 'fully investigate' claims by some customers that High Notes 5 was in fact sold on such a promise.

Meanwhile, UOB and OCBC Bank said that though some customers have invested in Lehman-linked products, the volume was 'modest' and 'negligible'. 'Since news of Lehman filing for Chapter 11 broke, we have taken a proactive approach in updating clients on the latest developments,' said UOB's spokesman.

OCBC's spokesman said in an e-mail that its securities unit has advised customers to wait for updates from Lehman.

-- Sep 18, 2008, The Straits Times

It is always the fine print by the banks that confuse gullible investors.

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