Published December 19, 2008

Most serious loss from blowouts is that of trust

By SIOW LI SEN

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A DISCLOSURE by the insurance arm of OCBC Bank on Wednesday on its exposure to Wall Street fraudster Bernard Madoff ended with the assurance that it 'will have no material impact on the group'.

Great Eastern Holdings (GEH), 87 per cent owned by OCBC, said that its exposure of about $64 million represents 0.14 per cent of the group's total assets of $45 billion as at Sept 30, 2008. But GEH also said that unit Lion Fairfield, acting as an agent, has sold about US$45 million of the Fairfield Sentry fund through private banking channels to accredited investors. Fairfield Sentry fund is reported to have placed US$7.3 billion solely with Madoff who was arrested last week in what US prosecutors said was a US$50 billion Ponzi scheme to defraud investors.

Retail investors who invested in the LionGlobal Flexi Fund too will suffer some loss. The LionGlobal Flexi Fund, which is sold to retail investors, has an investment of about $350,000 in the Fairfield Sentry fund. This investment represents less than 1.5 per cent of the LionGlobal Flexi Fund's portfolio as at Dec 11, 2008. Similar statements of 'no material impact' have also been made by some of the 10 financial institutions (FI) which sold the failed Lehman-linked products. Almost 10,000 retail investors bought products linked to now-bankrupt US investment bank Lehman Brothers, amounting to $501 million.

While the exposure is regarded as insignificant when placed against the billions of dollars of assets of the various FIs, the negative fallout is severe.

Since September when Lehman Brothers went bankrupt, the FIs have had to devote expensive management resources on complaints of mis-selling, answer to the regulator and repair their tarnished reputations.

The Monetary Authority of Singapore (MAS), also on Wednesday, revealed that it is interviewing senior managers of the 10 FIs as part of its investigations into the claims of mis-selling. The regulator, which has been pressing for the rapid conclusion into complaints of investors, said that all the FIs have teams working long hours to meet its review targets. In some cases, these teams comprise 100 to 120 case officers, the MAS said. That's a lot of people, who otherwise could be engaged in more productive work.

In addition, a whole battery of external consultants have been hired to advise on the issues. They include senior accountants and senior lawyers, including one of the most feared litigators in town, Davinder Singh, senior counsel and chief executive of Drew & Napier. All have to be paid for.

This has not included the legal challenges which the FIs will find themselves facing from some deep-pocketed aggrieved investors.

The most serious impact from these financial blowouts is arguably the loss of trust and confidence in our FIs, and probably the hardest to restore.