Were MiniBonds/DBS Notes 'Safe' ?
Pictured above is DBS credit ratings.
I am trying to put myself into the shoes of the Bank's relationship managers who sold the MiniBonds or the DBS Notes. What would I have said back in 2007 given the market conditions?
Back in 2007, Lehman's Long term credit rating by Fitch is AA- (DBS is now AA-). So the rating agencies are assigning an equal probability of default to DBS and Lehman back in 2007. To put it simply, placing a fixed deposit with DBS would be just as risky as selling protection on Lehman (if we discount the Deposit Insurance Act in Singapore).
So what does an AA- rating by Fitch mean? On their website, it says:
Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
So to a lay person (no access to credit market data), given the information available in 2007, it is not impossible for one to judge that Lehman was indeed a 'safe' counterparty and the risk undertaken then was miniscle.
The turn of events over the last month was truely astounding. To this date, Lehman's credit rating by S&P is still A, four notches above junk status.
1 comment:
After reading the article on Minibonds on Straits Times, I was thinking that even a sane and well informed investor would probably sink their money for a piece of the action even though they would be practically insuring Lehman from the default of the 6 major banks.
Who would have thought that things might turn out as such?
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