Minibond is a brand name for a series of structured financial notes issued in Hong Kong under the control of Lehman Brothers. It is a misnomer to describe the Minibond as credit-linked note because of the Synthetic Collateralised Debt Obligations hidden in the three-layered structure (as all series of Minibonds issued in 2004 and thereafter are). The term "Minibond" is also used to refer to other likewise structured Notes, namely Constellation Notes and Octave Notes, respectively issued in Hong Kong under the direction of DBS Bank and Morgan Stanley. These Notes, coupled with Minibonds and other Equity-linked Notes issued by Lehman Brothers, are sometimes officially referred to as "Lehman-related securities". For the sake of completeness, Lehman Brothers arranged 3 "Special Purpose Entities" (hereafter "SPE") to issue Minibond-like Notes in Hong Kong from 2002 to 2008. Minibonds are issued by Pacific International Finance Limited, and the Notes issued by the other 2 SPE are branded "ProFund Notes" and "Pyxis Notes". Unlike the Minibonds which have a three-layered structure, these latter Notes feature 2 layers of notes bundled together with prominence given exclusively to one so as to obscure the nature and importance of the other.



Minibond is a brand name for a series of structured financial notes issued in Hong Kong under the control of Lehman Brothers. It is a misnomer to describe the Minibonds as credit-linked note because of the Synthetic Collateralised Debt Obligations hidden in the three-layered structure (as all series of Minibonds issued in 2004 and thereafter are). Full details of the Minibonds (plural expression herein refers to more than one series or all the series) are unavailable to the general public – even the note-holders because of the secrecy and other barriers put up by the relevant governmental authorities, and the financial and professional institutions. Those who have or ought to have the full details but refuse to disclose to the note-holders are the Securities and Futures Commission (hereafter “SFC”) and Hong Kong Monetary Authority (hereafter “HKMA”) of Hong Kong SAR; the HSBC Bank USA NA as Trustee of the series; the PricewaterhouseCoopers as Receiver appointed by the Trustee; as well as all the distributing banks and brokerages. The concerted action to keep the details of Minibonds secret by the regulators, trustee, distributors, and Lehman Brothers is consequential on the imperative to obscure the real causes of the systematic and widespread mis-selling that lasted for more than 6 years.

This article is divided into the following parts: firstly, how a Minibond is structured and how it is disclosed for the purposes of sales and regulatory compliance; secondly, what the relevant governmental authorities have been doing since the collapse of Lehman Brothers in purported performance of their respective statutory duties; thirdly, what the victims have been doing in trying to secure their legitimate interests.

A few words about truthfulness and objectivity of this article are apposite. While every effort will be made to refer to authoritative accounts of events, the fact is that accurate information in the public domain in respect of the Minibonds and their aftermath is scant and sketchy. The secrecy imposed by the industry players is designed to, and has the effect of, obscuring the true structure and nature of Minibonds thereby facilitate manipulation of public perception as to what happened. The overwhelming majority of victims, approximate 60% of the total of around 40,000, are known to be retirees, elderly and those without education. Neither the SFC nor the HKMA is willing to address how sizeable is the category of “vulnerable customers”. At any event, this group of vulnerable victims is easily intimidated, misled, and swayed; as will be detailed below. The inability of this group to make informed judgment seriously weaken any political pressure the rest of the victim body could muster.

Minibond Structure

While it is literally true that prospectuses of Minibonds are available at the official website of SFC (, it is practically misleading because the existence and availability of other documents constituting the so-called “underlying security” (i.e. the CDO) tied to each series of Minibonds are never properly made explicit by the SFC. Indeed, the SFC has persistently refused to acknowledge the importance of the CDO, let alone accounting for its complexity in any meaningful detail. After the collapse of Lehman Brothers in September 2008 that gradually brought into light the dubious (if not illegal) practices of the financial institutions concerned, the SFC and HKMA have each published their reports on 31st December 2008 ( The report by HKMA is here ( Readers are advised to ponder over whether the very (misleadingly) brief explanation of Minibond given in these reports is reasonable and proper, bearing in mind the reports are meant to account for what happened and why these regulators have failed to notice the systematic and widespread mis-selling of the securities to the public most of whom could not conceivably be taken as capable of understanding the intricacies of such financial instruments.

The official reluctance to go into the detail of Minibonds is echoed and followed by all the financial institutions concerned, including the HSBC Bank as trustee of the various Minibonds and Minibond-like programmes and all the distributors. However, there was at least one investor whose persistence enables him to secure some of the documents relating to the CDO that the government and the banks want to keep them off-limits. The following description of Minibond Series 35 (hereafter “Series 35”) is meant to be an illustration of all Minibonds from Series 10 onwards. For those of Series 9 and earlier issues, most of the “underlying securities” are issued by the Lehman Brothers Treasury Co. B.V. (the “LBT”), the note-issuing entity of Lehman Brothers whose liability is guaranteed by parent company. Apart from this difference, it is believed that all Minibonds share the similar ‘piggybacked’ structure which is designed and intended by Lehman Brothers to conceal the true substance of the securities so as to reap exorbitant profits.

Series 35 is made up of 3 notes of vastly different nature: (i) a First-to-Default Note (the “FTD Note”) issued by the PIFL that provides the façade to obscure or conceal the CDO underneath; (ii) a floating rate note (i.e. the CDO) issued by Beryl Finance Limited (the “Beryl”), a SPE created and controlled by Lehman Brothers; (c) a note issued by the Lehman US Dollar Liquidity Fund Institutional Reserve Accumulation Class (the “Real Collateral”). Functionally speaking, the FTD Note is merely a deceptive façade because it is not supposed to generate any revenue to the composite note. The FTD Note is credit-linked to six renowned international corporations and the sovereign credit of the People’s Republic of China. Accepting the credit risk of this portfolio only yields USD1 (one US dollar) to the issuer (i.e. the PIFL) for the entire term of the note (i.e. 3 years). The CDO is also a credit-linked note. Like the FTD Notes, the CDO is a bet on the credit-worthiness of a portfolio of securities typically in excess of one hundred selected from a wide array of corporations, industries, and countries. The issuer of CDO (i.e. Beryl) is liable to compensate its swap counterparty (a Lehman Brothers subsidiary) if the credit quality of the portfolio deteriorates. The amount of compensation payable is dependent on the extent to which the credit-worthiness of the portfolio deteriorates; hence, the swap may be terminated before expiry date if the deterioration has reached the pre-determined level.

Since the CDO is practically concealed by the FTD Note, the deception against the investors is to induce them to provide insurance protection in favour of Lehman Brothers in respect of the CDO portfolios, while all along they were led to believe that their fortune was hinged on the credit-worthiness of the renowned corporations named in the FTD Note. The extent of deception in the Minibonds could be fathomed in two ways. Firstly,one could compare the PIFL prospectuses and the following documents that are integral to Series 35. All the crucial details about the CDO and the swap concerning the CDO are grouped under an uninformative and misleading rubric of “display documents”. (a) Base prospectus dated 20 July 2007 and series prospectus dated 22 February 2008 issued by (the “Beryl”); (b) Principal Trust deed dated 30 March 2000 and supplemental trust deed between Arapahoe International Limited and HSBC Bank USA; (c) Principal Trust Deed dated 10 October 2002 (as amended and restated on 20 July 2007) between Dante Finance Public Limited Company and BNY Corporate Trustee Services Limited; (d) Swap confirmation dated 22 February 2008 between the PIFL and Lehman Brothers Special Finance Inc (the “LBSF”); and (e) Thirty-fifth Supplemental Trust Deed dated 22nd February 2008 between Pacific International Finance Limited, HSBC Bank USA National Association, the LBSF, Lehman Brothers Holding Inc, HSBC Bank plc, Lehman Brothers Asia Limited, Dexia Banque International A Luxembourg Societe Anonyme, and Lehman Brothers International (Europe).

The Mahogany Notes Mahogany Capital Limited (the “Mahogany”) is an Australian corporation under the control of Lehman Brothers Asia (the “LBA”) based in Hong Kong. The LBA had a designated team of staff specifically responsible for the design, packaging and promotion of derivatives financial products in the Asia-Pacific region except Japan. Therefore, all the Lehman-related securities and the two series of notes issued by Mahogany were the brainchild of the LBA. Prospectuses of the two series of notes issued by Mahogany (the “Mahogany Notes”) are available at (

The relevance of Mahogany Notes to Minibonds could be seen from two perspectives, namely structure and disclosure. Purchasers of Mahogany Notes are investing in CDO – the very same kind and complexity as the CDO embedded in Minibonds. Since the Mahogany Notes are not tied together with any FTD Note, the purchasers had a better chance of finding out exactly what they are investing in. What Mahogany invested with money received from the purchasers was CDO issued by Saphir Finance Limited (hereafter “Saphir”), another SPE created and controlled by Lehman Brothers. Saphir also provides CDO to around one-third of Minibonds that remain outstanding at the moment when Lehman Brothers went to bankruptcy.

Therefore, what the LBA did was to market the same kind of CDO in Australia and Hong Kong in different manner. In Australia where the rule of law has stronger root of tradition, the sale was conducted more scrupulously and this author has no knowledge of any complaint of mis-selling or malpractice arising therefrom. By contrast, Hong Kong under the rule of Beijing has been deteriorating morally, culturally, intellectually to such extent that the majority of inhabitants there has no concern about rule of law, some of them may even be willing to trade law for immediate profit. This explains why there was a widespread and systematic mis-selling by some 2 dozens of registered financial institutions over a period of some 6 years from 2002 to 2008. More on the government reaction to its acquiescence, if not complicity, in the mis-selling (or fraud) is discussed below.

After Bankruptcy of Lehman Brothers

Protests and Solutions

See also

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