Morgan Stanley says Lehman-linked notes worthless

SINGAPORE: US bank Morgan Stanley said 26 million Singapore dollars ($17.2 million) of notes linked to bankrupt brokerage Lehman Brothers Holdings Inc. are now worthless.

The notes, known as Pinnacle Notes Series 9 and 10, are subject to a mandatory early redemption because ``credit events'' occurred in at least five of the notes' underlying assets _ Lehman, mortgage companies Fannie Mae and Freddie Mac, and two Iceland banks _ Morgan said Friday.

The notes' underlying assets were synthetic collateralized debt obligation securities, known as CDOs, that were recently cut to the junk rating of CCC- by Standard & Poor's from investment grade AA when the notes were sold last year, Morgan said.

Morgan Stanley Asia arranged the notes, which were sold by five Singaporean brokerages to about 700 investors.

``Given the current values of the underlying assets and credit default swap transaction, we anticipate that investors will lose all of their original principal investment,'' the bank said in a statement on its Web site.

Singapore's DBS Group said last month $68 million of notes linked to Lehman were worthless, part of $239 million of notes the bank sold to about 4,700 clients in Singapore and Hong Kong. Central bank officials estimate banks sold about $2.6 billion of Lehman-linked notes in Hong Kong, while Singapore investors bought about $400 million.

DBS said last week it would pay up to $47 million in compensation to investors who received poor service. Singaporean investors, some of whom were retired or not well-educated, have said bank officials did not properly explain the nature of the notes.

Lehman declared bankruptcy on Sept. 15.