High Notes 2

Hi Mr. Tan,

DBS has just sent to HN2 investors a list of names under the so called AA-rated basket of securities held by Constellation, the company owned by DBS and is the counter-party with DBS for various swap contracts.

There are 100 names in the list and I am very surprised that only 25 names are rated AA or better. There are 22 rated BBB+ or below. AA- to A- accounted for the balance 53. How can such a basket of securities rated as AA?

This is akin to call a basket containing a mix of some copper coins, alluminium coins and gold coins a basket of gold cans! This is grossly misleading!

All the while, the bank has been very secretive about this list of names. I think because it does not want to let investors know that the rating of AA for the basket of securities is actually not justifiable. The fact there are some low grade bonds in the basket may cause much discomfort to the investors. The bank as warned that this list is confidential and may not be copied or distributed. What a big secret is it!

The worst thing is after the defaults of 3 names in the basket of securities, the bank informed investors that a further 2 defaults would trigger a credit event. This is very unfair because nowhere in the pricing statement can we find any provision dictating that 5 defaults out of 100 names in the basket will constitute a credit event. The bank has no right to impose such a new default clause now!

On 23.9.08, the basket of securities was re-rated as BBB+. I am not surprised, as it should not have been rated AA in the first place, and the rating agencies have been under a lot of criticism after the subprime problems started because a lot of CDOs in the market were given ridiculously good ratings by such rating agencies.

Mr. Tan, I hope you could post this email in your blog and I would like to call on all interested parties to protest to the bank for being not transparant about the contents in the basket of securities when they launched High Notes 2. We must also object to the bank imposing the new default clause that is not provided for in the pricing statement.

One more thing, the bank proudly stated in the pricing statement that the notes are designed for "defensive investors seeking enhanced yield by providing exposure to a basket of highly rated regional and international banks (the reference banks...." What a misleading statement!

WT