They were so nicely packed and presented, with lofty ratings and high yield. But, few were aware of the poison inside until the sugar coat was taken off.

CDO, MBS, ABS and SIV, dressed up as "innovative and sophisticated", were hot buys by local banks in the past few years. But, their values plummeted since the meltdown of the housing and financial markets in the US in the second half of last year.

Subprime-mortgage-backed securities are now known as "junk bonds", however, the original AA/AAA ratings have made the risk masked.

"Banks rely on the AA/AAA credit ratings in making their investment judgment, neglecting the risk behind the high yield," said Stanley Wong, an executive director at ICBC (Asia).

"Usually, AAA credit ratings are reliable. Even the situation is deteriorating, those securities should only be downgraded gradually. However, it's a sudden death this time," said Vincent Cheng, an executive director at HSBC Holdings.

Some attribute the responsibility to rating agencies, but some say investment banks, which are underwriters, "beautify" the bonds and knock at the doors of rating agencies for a handsome rating for their products.

Cheng admitted that the risk of new products is difficult to be recognized in advance.

Now "the lesson for banks is that, don't trust the ratings blindly," Cheng said.

Wong agrees that banks were investing without fully understanding the structured products.

An experienced banker, Wong noted that today's bitterness also results from the competition between banks.

"Under the low interest-rate environment, banks need to struggle for profit growth. They have to look for high-return investments. It's a global trend, and banks are facing that kind of pressure," Wong said.

Compared with the US and European banks, the subprime turbulence has not seriously affected Hong Kong-based banks.

"Luckily, Hong Kong banks are less talented," Wong said. "They are not capable enough to underwrite those bonds." As he recognized that the investment banks in the US and Europe were deeply involved in the subprime-linked investments as they were the underwriters of the bonds.

Wong also noted that local banks have become more conservative in investing after the Asian financial crisis in 1997.

Hong Kong and the US mortgage markets are different, as Hong Kong is less involved in bad credit. So it's unlikely that Hong Kong will face severe subprime problem, Wong said.

"During the Asian financial crisis and even SARS, when the property market was sent to the bottom, local banks insist on the 70 percent mortgage requirement," he recalled.

Both Cheng and Wong said the subprime crisis has yet bottomed out, but Hong Kong banks have made adequate provisions. So they believe that the worst should have passed.

However, Wong said falling US property prices indicate that its economy is heading toward a recession. He worries that the subprime crisis will hurt the core-business of banks by causing a global economic slowdown.

(HK Edition 04/15/2008 page2)