After more than 7 hours of debates, the Legislative Council has finally voted yes to invoke special power in investigating the selling of Lehman minibonds. The two notable persons who opposed to this motion were David Li Kwok-Po, Chairman of Bank of East Asia and Regina Ip Lau Suk-Yee.
It is not surprising to see this motion pass because all the political parties in Legco are pro-masses and supporting this motion. But the passing of this motion has great impact that the legislators may have ignored:
i) The free market in Hong Kong is gone. From now on the financial markets will be a lot more regulated. On the other hand, the free market spirit is already gone in other parts of the world anyway as banks in the UK and the US are now getting government’s funding and are under strong scrutiny from the government.
Now the banks have an excuse not to pay back the mini-bondholders anymore, until the entire investigation is finished. The whole investigation will probably take at least a year. With some of the banks that have considered repaying the mini-holders next month, will they hold on to their promise and pay back the poor mini-bondholders?
Will the value of the minibonds be diminshed further after a year? Those bonds are not like gold bullion that have more or less a stable value. These products can be a piece of worthless paper anytime and what good can the investigation give to the bondholders who have lost their fortune?
From now on, banks may not be bold enough to issue similar structured products like the minibonds anymore. This is a big blow to the finance community as the bull market a year ago was more or less driven by the proliferation of structured products. A lot of banks were growing quickly because they have made a killing on these products. And also, this type of products support a whole spectrum of people: traders, structurers and sales in investment banks, sales in private banks and retail banks, etc… A lot of these people will be out of job!
