VZCZCXRO8152
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1757/01 2661102
ZNR UUUUU ZZH
R 221102Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5844
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001757 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT:  PROTESTERS ANGRY OVER LOSSES RELATED TO LEHMAN- 
ISSUED DEBT INSTRUMENTS 
 
¶1. Summary: On September 21, Hong Kong's Democratic Party 
(DP) organized a protest by approximately 500 individuals who hold a 
structured debt instrument issued by Lehman Brothers.  They claimed 
the investment's risk profile was misrepresented to them by the 
local commercial banks who distributed it.  Local media reported on 
September 22 that thousands of HK residents may hold as much as USD 
1.6 billion (HKD 12.7 billion) of the Lehman-issued paper.  HKG 
officials warned investors that their losses would likely be 
significant, and the chairman of the DP threatened to organize a 
class-action lawsuit.  Although the Hang Seng Index (HSI) closed up 
1.6 percent on September 22, and trading volumes and inter-bank 
interest rates stabilized, local newspaper editorials forecast 
further market turbulence.  They said the USG plan to purchase 
distressed mortgage-related paper would significantly increase the 
USG's total debt, depreciate the U.S. dollar (to which the Hong Kong 
dollar is pegged), and result locally in increased commodity prices 
and interest rates.  End summary. 
 
Lehman "Minibond" Holders Stage Protest 
--------------------------------------- 
 
¶2. On September 21, in a march organized by Hong Kong's Democratic 
Party, approximately 500 retail investors holding "minibonds" issued 
by Lehman Brothers marched to the headquarters of Hong Kong's 
Securities and Futures Commission (SFC).  (Note: Minibonds are fixed 
income debt instruments with an appreciation potential linked to the 
trading prices of several blue chip stocks on the HSI.)  The 
individual investors claimed the risks involved with the 
Lehman-issued minibonds were not accurately represented to them by 
the local commercial banks who distributed them.  The investors face 
losses totaling at least 75 percent of their minibond holdings.  SFC 
CEO Martin Wheatly told Chinese-language newspaper Ming Pao on 
September 22 that Lehman issued approximately USD 1.6 billion (HKD 
12.7 billion) of minibonds in Hong Kong, accounting for 40 percent 
of the total market share of these structured finance products. 
 
¶3. Thirty representatives of the protesting retail investors raised 
their concerns on September 22 with officials from the Hong Kong 
Monetary Authority (HKMA), SFC and banks that served as trustees for 
the paper (e.g. HSBC).  HKMA Executive Director Raymond Lee told the 
press after the meeting that the HKMA would urge the distributor 
banks to contact their retail investors and inform them of their 
holdings of the Lehman-issued minibonds.  Lee said the HKMA would 
enforce disciplinary action against any banks that committed 
"irregular activities" with regard to selling the minibonds to 
retail investors. 
 
¶4. Democratic Party Chairman Albert Ho, a lawyer, said his party was 
considering whether to file a class action lawsuit on behalf of 
retail investors who purchased the Lehman minibonds. 
 
Hang Seng, Interest Rates Stabilize 
----------------------------------- 
 
¶5. Hong Kong's Hang Seng Index (HSI) closed 1.6 percent higher on 
September 22, as trading volume and volatility returned to more 
normal levels.  Analysts awaited further word from the United States 
regarding the USG's proposed plan to purchase up to US$ 700 billion 
of illiquid mortgage-related securities. 
 
¶6. HIBOR inter-bank loan market rates differed little from the 
previous trading day.  At 1620 HRS local time, HIBOR rates were as 
follows: overnight 2.5 percent; one week 2.75 percent; one month 
3.35 percent; three and six months 3.05 percent. 
 
HK Media Skeptical About USG Efforts 
------------------------------------ 
 
¶7. While HKG officials made no substantive public comments on 
September 22 concerning the USG's plan to purchase up to USD 700 
million of distressed mortgage-related debt instruments, local media 
were very vocal.  The local Chinese press warned that the USG might 
have to pay a high longer-term price for its "market rescue 
measures."  The independent Hong Kong Economic Times editorialized 
on September 22 that the USG's debt financing of its various bailout 
plans would drive Treasury yields higher and result in higher 
interest rates for U.S. businesses.  The editorial also stated that 
the U.S. dollar would likely depreciate, thereby possibly triggering 
"another round of global financial turmoil."  (Note: The Hong Kong 
dollar's value is pegged to the U.S. dollar, which means Hong Kong 
must follow U.S. interest rate policy, even if not appropriate for 
local inflation and growth rates. End note.) 
 
¶8. The independent Hong Kong Economic Journal opined that "a 
complete reform of the U.S. financial sector is inevitable," in the 
wake of the USG's response to the financial crisis.  The journal 
 
HONG KONG 00001757  002 OF 002 
 
 
said investors are losing confidence in the operating models of U.S. 
investment banks, as well as their related regulatory mechanisms. 
 
¶9. Meanwhile, an editorial in the pro-Beijing Ta Kung Pao daily 
newspaper expressed skepticism about the effectiveness of the USG 
rescue plan, saying it might trigger more financial turbulence.  The 
newspaper said the U.S. national debt would increase significantly, 
which in turn would cause a depreciation of US dollar, rising 
interest rates, and higher commodity prices.  Ta Kung Pao warned 
that Hong Kong and Mainland holders of U.S. dollar assets such as 
Treasuries would ultimately suffer along with the U.S. economy.