Guaranteed bonds - not as safe as you think?

EdInvestor

Sunday times


Note that there is no compensation if the underlying guarantor (eg Lehman Bros) goes bust but the GEB/GIB issuer remains in business.

... the Financial Services Compensation Scheme won’t help. Had the product providers such as NDFA and Arc gone bust, they would have been covered. Because the problem lies with underlying securities issued by Lehman they have no such protection. Again this was in the small print; again the question will be whether advisers made it sufficiently clear.

alanq

At least Yorkshire Building Society is explicit.

"The Guarantee is the obligation of Credit Suisse International to repay the capital invested in the deposit in full at maturity. Should Credit Suisse International default, there is no guarantee provided by any third party."

http://www.ybs.co.uk/investment/gia_web/guaranteed-investment.jsp?int_cmp=gia16_hp_aug08

EdInvestor

Surprise surprise, regulators are not (yet) on the case. Memories of the precipice bonds scandal are beginning to surface..

http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=173503&d=340&h=341&f=342

dunstonh

So far its only the higher risk ones which seem to be hit. However, even these ones were rated at medium risk and you wouldnt expect total loss to be a consideration at medium risk level. So, someone needs to look into this carefully.

I remember being told back in the 90s by a compliance adviser to never refer to these products as guaranteed as they are not. He used to say use that they should be documented as "offering a degree of capital security". Looks like he was spot on.

What is a shame here is that the regulators and FSCS dont seem to know what the position is despite these products being retailed for the last 15 years or so to retail clients and the term "GEB - guaranteed equity bond" being used common place.

On the upside, it does appear to be only a minority of consumers that are going to be hit and the versions involved were not risk free to begin with.

Speculator

Hong Kong investors were persuade to invest in "Mini Bonds" by sales staff at local banks such as Bank of China. These bonds were unfortunately backed by Lehman Bros and some investors, mostly pensioners have lost their entire life savings.

http://www.chinapost.com.tw/business/asia/hong%20kong/2008/09/24/175991/HK-investors.htm