Building Pyramid Schemes, the Singapore Way

A few days ago, I was at a dinner party and got to meet a lot of nice and interesting entrepreneurs and senior executives in telecoms and technology.

One of them decided to share some of his investment wisdom with me — I didn't tell him about my background — and here's what he told me:

1. You buy a house for say SGD 700k. You'll need say 200k as a downpayment, and borrow 500k from ABC bank (I'm not going to name the bank involved).
2. Then, you withdraw those 200k equity you have at say 2%.
3. With the 200k, buy bonds of ABC bank (which lent you the mortgage in the first place). Those bonds pay about 5%.
4. Then, because you've bought your home with money borrowed from ABC, and you've bought bonds of ABC with the cash of your equity withdrawal, the bank will lend you some more money, up to about 50% of your bond holdings, if you agree to buy more of those bonds. So you get another say 100k with an interest of about 2.5%, that you'll invest in the ABC bank bonds at 5%.

You end up with:

• about 120% of the value of your home borrowed
• almost 50% of the value of your home invested in ABC Bank bonds
• being an interest rate speculator, and buying illiquid debt from a bank which future is obviously more than hazardous given the schemes it's setting up.

What do you think?