How to reward prudence? There are 2 forms of reward: (1) recognition; (2) financial. How to balance the weight of each reward type in the risk manager’s compensation while risk takers are awarded handsomely for their success.

Nobel Winner Aumann Says Bernanke, Paulson Steps `Not Smart’

Nov. 2 (Bloomberg) — Robert J. Aumann, the Israeli economist who won the 2005 Nobel Prize in economics, said the steps taken by Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson to save financial markets “weren’t smart.”

“The intervention by the regulators to save the U.S. economy will lead to further bankruptcies of banks and insurance companies,” Aumann said. “They are only encouraging institutions to take more uncalculated risks.”

The crisis in the financial markets was caused by the incentives provided to managers of banks and other financial institutions that caused them to act to their own benefit and not the banks’, he said. Bonuses were given on the basis of loan sales, without considering who the borrowers were, he said.

Aumann, who won the Nobel Prize for his work on game theory, said there is “no financial crisis” in Israel. The Israeli government’s decision not to intervene in the financial markets was correct, he said.

I suggest that these Signaporeans should buy Government bonds and enjoy a higher interest rate, and have the Government guarantee. Why allow the banks to make profit on the guarantee that is footed by Singapore taxpayers?

I am concerned that the Government guarantee is used to guarantee the foreign banks operating in Singapore and also to attract foreign depositors to keep their money in Singapore – to depress our interest rate, and to allow the banks to make more profits.

And, if the bank take high risk with the money (e.g. to buy deriviates or future trading), the Singapore taxpayers will have to bear the loss. And it can go into billions of dollars.

Is it worth it? Does it benefit Singapore?

Hi Mr. Tan,

The side effects of the deposit guarantee schemes are starting to surface across NZ and Australia:

1) http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10539859 (29 Oct)

Quote:
More than $1 billion has been frozen in mortgage trusts after AXA New Zealand yesterday locked up three of its funds.
AXA said the suspensions were because of confusion over who will be covered by the Government’s deposit guarantee scheme and fears that investors will take money out if it is not guaranteed.
The funds have a combined value of $225 million from about 5000 investors.

2) http://business.theage.com.au/business/go-to-centrelink-swans-advice-on-frozen-funds-20081023-57gk.html (24 Oct)

Quote:
PRESSURE on the Federal Government over its bank deposit guarantee has escalated after three big financial institutions hit with a spate of withdrawals by customers last night froze their accounts.
Tens of thousands of Australians, many of them retirees, are now unable to get immediate access to their capital after AXA Asia Pacific, Perpetual Investment Management and Australian Unity suspended withdrawals from some funds.
Treasurer Wayne Swan responded last night by advising people adversely affected to go to Centrelink to see if they were eligible for income support.

Thanks.

Regards,
Hang Lian

19) Singalong on October 29th, 2008 4.54 pm After reading your article, my feeling is that your article is out to provoke rather than to inform. It seems that the details of the financial guarantee was deliberately left out in the main article and left readers anxious, bewildered.

You appear suddenly with a statement that attack me, saying that the details are “deliberately left out in the main article”.

I do not recall seeing you before. But you do remind me of another person who has been attacking my views on all possible occasions. This person has probably changed his name and continue to attack me under another name.

If you wish to engage in a debate, it is proper that you use your real name and occupation. If you have a different view, you can state your view and avoid attacking or making judgement on other people.

What is trivial is relative. What excessive fund we are talking about? Did we lose sight of the fact that Sg is currently facing technical recession? Are we unaware that the world is struggling with global financial crisis? There is a global credit crunch! There is unprecedented globally co-ordinated governmental intervention to prevent systematic collapse in the banking systems. US has offered US$30 b swap facility. Surely, Sg, an open economy cannot claim to be immuned from the rest of the world.

No one is perfect, no matter how experienced one is!

It will be worse, if the bank engage in risky activities, such as speculate in derivatives, credit default swaps, trading in financial assets. About 10 years ago, Nick Leeson brought down Barings Bank by trading in futures and lost a lot of money.

Already, the Government has given the guarantee, so it is important for MAS to be able to monitor the operations of the banks closely. They cannot just advice the bank to “avoid risky activities”. MAS has to be more vigilent.

Perhaps, MAS can introduce a risk based charge now, just like what is done in New Zealand. If the bank does not agree with the charge, the bank can refuse to take the deposits. This is a fair approach.

The charge should be based on the credit rating of the bank. If they have lower capital and lower rating, the charge is higher. In the case of New Zealand, the charge varies from 0.1% (i.e 10 basis points) to 3% (i.e. 300 basis points) depending on the financial strength of the bank.

I prefer another approach. The savers can buy Government bonds for 1 to 20 years and earn the market rate of interest (say 2% to 4%). The government lend the money to the bank at this cost plus a credit spread (say 0.1% to 3%) depending on the credit rating of the bank.

This approach gives a better interest rate to the savers, and locks up the money for 1 to 20 years, which is more suitable for the bank to lend for a similar duration. It avoids the duration risk and also the risk of unexpected withdrawal.

I shall write a separate paper on this matter, i.e. issue government bonds to collect money and lend back to the financial institutions.

It’s a very powerful tool introduced by the federal government and that’s why the recent financial tsunami didn’t hurt too many banks and depositors in Canada.

Perhaps, Kin Lian can have a look at it and give Singaporeans a gist of the various schemes.

So far, MAS is resolving the claims of the “vulnerable group”. I suspect that it represents less than 10% of the investors.

The remaining 90% are anxious that their claims will not be handled fairly. I agree with their anxiety.

The Petition ask MAS to investigate if there are wrong doings, i.e breaches of the two Acts. If so, MAS has promised to take appropriate action according to the law. I hope that they make some statement on this matter soon. It has been 4 weeks since the Petitio was lodged.

In Hong Kong, the monetary authority discovered 40 cases of breach of the act, and have passed the complaints to the securities commission. I hope that MAS will make some statement about this matter soon. It will array the fears and uncertainty faced by the “non-vulnerable” group.

Thank you for posting with your real name.

My opinion is that the Gov did not do well. Considering the pay and the praises of SG being 1st class, etc. It should ve been better. So far, most of the actions are following, reactive, etc and usually weeks later. This kind of response is sincerely pretty unacceptable.

“Too much should not be read into whether this measure is favouring the foreign investors and the rich over the general public. ”

This is important too as the guarantee comes from our pocket, u, me, my neighbour, etc. If this change then yes, (Do not use our money) then the Gov can jolly well favour whoever they wan. But if the PM says they cannot make decisions for us, then i would say, FAVOUR ME…

“therefore the question of whether the reserves of $150b being insufficient to cover the total deposit of $700b is only of theoretical importance. The fact that there are no panicky bank runs in Singapore today proves that the measure has been successful. ”

If u recall, only a very small handful of pple predicted ML to fall. Most pple in the world, did not ve a clue to wat hit them. ML’s fall. So now we are back to sq 1?? The qn of whether 150b is sufficient is only theoretical importance. I think not, as ML’s fall was only a theory which happened and cause the happenings around u and i today.

Lastly
“A delay in response by the Govt only shows that their decisions are not taken lightly or rashly. And their ability and audacity to make U-turns in policies is evidence of flexibility and resourcefulness in the light of the unpredictable global financial climate.”

They didn’t delay in response, they responded bloody quick by saying “You go to the bank yourself and settle” Tat was the response in double quick time. They weren’t slow at all. The complains now is They did not take apporiate responsibility.

As for the U-Turns, your way is one way of saying it. Most pple Online. No, i shouldn’t say most, i should say, my personal opinion is that if HK DBS, HK MA do it, and SG DBS, MAS dun do it, we slap ourselves.

So i agree with Mr Lucky Tan on 1 thing which is, those who invested in SG should be thankful that it happened in HK too.

In the Article :

PM Lee says buyers of Lehman-linked products should seek resolution with banks first

By Channel NewsAsia’s China Correspondent Wong Yee Fong | Posted: 26 October 2008 2203 hrs

It was reported that , i quote , ”

“I think this is a very difficult and not very satisfactory way in the long run. First of all, government should not be making decisions for individuals; individuals should have the right to decide for themselves, their circumstances, their preferences, their needs. And secondly, the government is not in a position to guarantee what is safe and what is not safe because there is nothing which is 100 per cent safe,” he said.

Prime Minister Lee said the government’s role is to make sure that the financial system proceeds fairly and properly, not to guarantee the outcome but to make sure that its people know what they are doing. For the investors, this would mean that they are properly educated and understand the products they buy and their rights as consumers. ” “, unquote.

By this, I like to clarify, does he mean the same for TC’s Lehman investments as well?

Recently, a TW political commentator praised Singapore to have the ability
to use the People’s CPF related money to invest. She/He admitted that such things
could never have happened in TW. I wonder what does she mean by that ?

Ok, investments cannot be guaranteed safe is one thing, but who is RESPONSIBLE and ACCOUNTABLE for an investment success ? Likewise, WHO is RESPONSIBLE and ACCOUNTABLE for an investment fiasco? Is this a logical question begging to be asked? If you know better than me, kindly reply.

As I feel that it would take a while or long time, for our alternative party to raise this question, I wonder is it a way to better utilize our Hong Lim Park by holding a discussion with the public on this topic which seems like a topic of public interest.

Unfortunately, I am not an eloquent speaker. I hope the Linguistically Bombastic, ABLE, CAPABLE, Knowledgeable and Compassionate and BRAVE could kindly step forward and contribute to the discussion. Else, things will remain as it is, as in no one from the public will discuss the issue to get clarifications.

Ideally, I hope the authorities can send their representatives who has the power to make decisions to discuss on ‘live’ TV, unrehearsed.

truely yours,
wong khia soo

You asked if the guarantee is given free. I searched for the answer to this question. I could not see any mention of any fee that is being charged. It is likely that the guarantee is given free.

The Government thinks that the risk is small, but I am not sure that they have the means to monitor and manage the risk and keep it as a small, remote risk.

I see from the statement that the Government urges the banks to “avoid risky activities”. I wonder how this can be achieved. The banks could take big bets on the derivative market and credit defaults swaps and lose a few billions in deposits quite easily.

Here is a horror story – it is just imagination at this time. Suppose that a bank already has a few hundred of billions of toxic products and is already insolvent. Suppose they take in a few billions of deposits in Singapore. Suppose they have a clever way of transferring the toxic products into Singapore (and still owned by the bank). And these toxic products are declared to be losses of the Singapore operations. Will the guarantee be called? Will this be like the minibond crisis, but done on a scale of 100 times?

I will sleep sounder if I know that there are ways of monitoring and managing the moral hazard of this guarantee. I wonder if our MAS has the expertise and resources to identify and manage this risk?

There are merits and dangers in the Government guarantee of bank deposits. There are various ways to carry implement this measure. Some of the issues are:

> should it protect Singaporeans or foreign depositors or all?
> should it cover Singapore or foreign owned banks or both?
> should there be a fee for the guarantee?
> how does the Government or MAS ensure that the banks do not carry out “risky activities”?

I was able to find some details, which I put in my main article and in a comment. (I do not know why an anonymous person should attack me on this trivial matter, unless this person has an ulterior motive). Some people knows the detail and can add them here.

I do not like to attract too much money deposited by foreigners in Singapore. We do not need the money. They only help to depress the interest rate in Singapore to the detriment of our retirees and savers. The banks earn a large margin, but the profit does not benefit Signaporeans as a whole. Even our local banks (such as DBS) has a high foreign ownership.

I am beginning to see more people using their real names in Online Citizen. Welcome! And congratulations for your courage to contribute to an open and sincere debate.

I tink what you want to say is: money guarantee or no guarantee; up interest rates or no hike. simple: both oso i want.

Of course everyone wants guarantee and up interest rates – got safe money and free money, who dun want?!

Anyway, it’s our own money why it is not safe in our banks in the first place – I thought all the while my money in POSB is safe – if it you mean zhen hu open the bank, I put money inside not safe? Sure guarantee one what, where got no guarantee?

after reading your piece, I support the PAP government’s guarantee. If PAP don’t guarantee, why will happen to my money if bank go bust? Certainly not Mr. Tan or TOC. So PAP is guarantee so that my money is safe.

PAP government also need to increase interest rates for savings. Or else, put money in bank for what? But interest rate so little now so must increase. Interest rate should match inflation – say 6% for everyone.

I agree with PAP looking after our money, we don’t have to worry – got guarantee and good interest rates, no need to take on high risk products.

All the financial problems we see today is because PAP did not guarantee our money (and all the while I was misled to think my money is safe in Singapore banks) and interest rates low.

when i open savings account with POSB long long time ago, i did not remember they say my money inside is not guaranteed- is it they mis-sell me?

if zhen hu guarantee my money and up interest, i will vote them next erection, no need to upgrade my hdb.

Transparency is good, but only insofar as if it helps to clarify matters and establish mutual trust. It does not mean that every deliberation and every consideration entered into is publicized for media consumption.

If you are the Govt and you do that, I will not trust you. Govt policies are not determined by public auction! The public seems to have pre-judged the mini-bond issue – the general feeling is that the FIs are the bad guys, the retiree-investors are the poor victims and Mr Tan Kin Lian is the greatest hero in Singapore’s history.

Let me caution you that things are not as simplistic as they appear. Are ALL mini-bond sales fraudulent? Are they being deemed mis-sold only when there are losses, not when there are gains? Is it possible that burnt investors now act blur to try to get their losses invalidated? By having unwittingly stirred up emotions at the Speakers’ Corner, is Mr Tan doing more harm than good to the situation? Etc, etc …

So knowing that the Govt cannot be embarrassed too often, they must tread carefully. I can fully understand their position.

Singaporeans no need worry, as long as we defend all people living in singapore, singapore will be safe. Our frontline people are talented.

Foreigners stay in Singapore enjoying local benefits whilst we, the citizens, play security guard and forced to go RT. Do foreigners need to go RT? Sigh, my thanks to those guys who do RT.

I’d really like to have a government that puts Singaporeans first (at least in thought but more in practice).

As S’poreans know, foreigners here are treated better than S’poreans. Ask all the FTs.