The controversy over Goldman Sachs’s misprinted Hong Kong warrants has mostly blown over now that a majority of investors look like accepting the settlement offered, but in the aftermath the bank and the regulator must ask themselves some serious questions.
First, some background. On March 31 warrants linked to Japan’s Nikkei 225 index and sold by Goldman Sachs began to spike in value, because, it now seems likely, a single investor had noticed what proved to be a small but serious error in the settlement documents. Rather than settle at (closing level minus strike level) times index currency amount divided by exchange rate, the original documentation multiplied the prevailing exchange rate. The substitution of a multiplication sign meant in theory the warrants were worth more than 100 times their intended value. Goldman Sachs acted quickly to request a suspension of trading of the warrants while the matter was investigated, and on April 21 announced it would buy back the warrants at 110% of the higher of the price paid or the total buyback value of the warrants, plus an admin fee of HK$5,000 ($643).
Nobody emerges from this mess with an enhanced reputation. Goldman will be embarrassed by an incident that has angered individual investors at a time when it is trying hard to avoid being seen as an arrogant and too-powerful institution. A spokesman for the bank played down the error, describing it as a typo in a call with Euromoney, and pointed out that investors will not lose money on the warrants.
It is, at best, unfortunate that Goldman’s well-paid teams of structurers, warrants traders, legal and compliance professionals all missed such a basic error; there is a world of difference between a minor typo and an erroneous mathematical symbol that materially affects the value of a product.
Several investors in Hong Kong have complained loudly about their treatment in this case, though Goldman points out that no investor has put forward a credible counterproposal to deal with the problem.
In a letter seen by Euromoney, one investor claims to have lost time value while the warrants were suspended; that it is unreasonable that Goldman Sachs be able to dictate the terms of the settlement without negotiation; and that both the Hong Kong Exchange and the regulator have ducked responsibility and left the product issuer to decide how to proceed.
While these claims have some legitimacy, they are undermined by investors being sticklers for the letter of warrants, rather than the spirit – some are screeching they have been ‘robbed’ because they are not being paid over a hundred times what the warrants were intended to be worth.
The Hong Kong authorities, meanwhile, should ponder how this incident has played out in public. There are intense political sensitivities in the city around the issue of individual investors versus banks, following protests over compensation for minibonds sold on Lehman Brothers’ credit before the crisis. Signs proclaiming ‘Hong Kong financial center is dead’ in multiple languages still hang outside several leading banks. In other jurisdictions, one source points out, there are sophisticated rules in place to correct errors in documentation; it is embarrassing for Hong Kong that this issue took so long to resolve. The incident highlights the emphasise how much retail investors lack a practical means of pursuing compensation from banks for perceived injustices, and the power of the issuer to determine the terms of a settlement in cases like this.
