Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

In the last eight years of cheap and abundant global cash, Singapore's central bank has acted again and again to protect lenders from the consequences of getting too greedy, especially in financing the city's pricey real estate.

But surely the island's nominally wealthy -- those ordinary people who were just lucky to own property in Singapore before it became a playground of Asia's rich -- also needed to be shielded from the  side effects of their own desperation for yield?

Sadly, safeguards for the little guys are coming a bit late in the day. 

Short Life of a Swiber Bond
The note, which paid a 7.125 percent coupon, trades below 16 cents on the dollar post-default
Source: Bloomberg

Bloomberg reporter Chanyaporn Chanjaroen on Tuesday chronicled the loss suffered by one Elaine Tham. All she wanted was to build a nest egg that would pay university fees for her children, but says she was persuaded by HSBC's local branch to invest S$250,000 ($183,000) in the bonds of a Singapore energy-services company. Swiber Holdings welshed on its debt in August. Had the bank not signed her up as an "accredited investor," based on a net worth (including her home and car) of more than S$2 million, Tham wouldn't have been able to buy the risky IOUs of an unrated issuer.

Swiber sold an an unusually high proportion of its notes to the wealthy clients of banks in Singapore. It's hard to say how many of the people now nursing large losses are of the type prepared to blow big sums occasionally in their quest to amass wealth, and how many are just risk-averse folk bamboozled by relationship managers into gambling away their life savings.

The Singaporean Balance Sheet
Housing accounts for the bulk of household net worth in the city-state
Source: data.gov.sg
*Data are for the end of second quarter of 2016.

It's not that the Monetary Authority of Singapore is looking the other way. Ever since the very public 2008 outcry over how banks had mis-sold Lehman-linked notes to regular Singaporeans as safe securities, the MAS has scrutinized selling practices and policies in the city's finance industry.

A year ago, the central bank said it would change the law in 2016 so that the default classification for new banking customers, who may meet the wealth and income criteria of accredited investors, would be retail. Banks won't be able to value primary homes at more than S$1 million in calculating the net worth of investors.

The change, expected to take effect next year, is welcome. If the newly wealthy wish to forsake protection and play in the more glamorous corners of finance closed to hoi polloi, they must explicitly ask. However, existing customers already categorized as accredited would still have to opt out if they didn't wish to be sold risky products.

With hindsight, the latter was perhaps the wrong decision. Behavioral science has shown that default options are considered more attractive no matter what they are. Policy makers have exploited this quirk for everything from improving organ-donation rates to making sure people are saving enough for retirement.

Given just how desperate the hunt for yield has become in a world of negative interest rates, the regulatory preference should be to treat all individuals, regardless of their wealth, as retail investors. Trading away that safety catch and spinning the roulette wheel on a 7.125 percent Swiber bond (now quoted at about 16 cents on the dollar) should be a deliberate choice.

Banks might whine at the extra work and cost involved in signing up customers all over again, but giving people a proper defense -- against their own folly and bankers' greed -- has to take priority.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net