Despite claims by UAE-based foreign and local banks about zero-exposure to the financial turmoil that is rocking the global economy, an investigation by Khaleej Times has revealed that possibly hundreds of retail and corporate investors may have lost their investments in structured products offered by Lehman Brothers through some banks operating in the Emirates.

While the actual magnitude of losses, estimated by some analysts to run into millions, is yet to be determined, banks which offered these products to clients through leveraged investment schemes, have started to call in the loan amount.

Some investors, who have refused to make any payments on grounds that they had been promised “a secure investment” by the banks, have been warned of legal action if they failed to repay as much as 50 per cent of the loan within five working days, Khaleej Times has learned.

When contacted by the newspaper, two international banks, which are believed to have been selling investors derivative based structured notes —  once referred to by Warren Buffet as weapons of financial mass destruction due to their complex financial engineering — said they needed time to respond.

Another bank, National Bank of Fujairah (NBF), said in a letter sent to a client, who refused to settle 50 per cent of the loan, that the bank reserved the right “to ask for any other security deemed fit in the event of any adverse change in the circumstances of the borrowers or if the value to the investment falls by 10 per cent. Failure to comply would constitute an event of default, in which case the investment can be sold to service the loan.”

One investor, who  asked not to be identified, said he had invested a “significant amount” in US dollars in a plan a local bank had claimed was a secure investment. “The bank representative also pushed me to leverage my deposit by 2.5 times to get more profit which they said is secured,” the investor said. “I was shocked that a few days ago when I received a call from the bank to say that my deposit is with Lehman Brothers and that the bank would like me and other investors to return 50 per cent of the loan in a premature way due to the ‘non-clarity’ in the status of Lehman Brothers.”  Financial analysts said more banks, which offered leveraging of between four and eight times, should declare their own losses and those of their clients, in the worst melt-down in recent history. 

P. Krishnamurthy, Chief Executive Officer of Dubai International Securities, said many investors in UAE had put their money in various derivative structured products and notes sold by investment banks like Lehman Brothers through local banks.   “Local banks, which have investment banking activities and selling third party products, had advanced loan to investors against such investments. The leverage by banks ranged from 1:1 to 1:5. In many cases, the underlying investment note is kept as collateral for the lending. Therefore, the repayment obligation was not a major concern to the investors at that time.”

Many investors had participated in these investments without fully understanding the complex formula of structured notes or even reading the fine print, he said. Such investments had not been considered so risky, either by the investors or local banks, until the recent collapse of the banking giants. “But in the changed scenario of the world financial markets, we learn that many of such structured products and notes are being quoted in secondary markets at prices far below their par value, some 20-30 per cent of face value. Investors are now worried about their equity as well as the loan obligations.”

issacjohn@khaleejtimes.com