Tuesday, April 01, 2008

Singapore’s investments in UBS; Merrill Lynch; Citigroup (aka triple whammy rotten eggs ).

Hi Friends,

When Singapore’s Government Investments Corporation (GIC) and Temasek Holdings bought substantial stakes in the above three financial titans, I was genuinely proud and excited.

Wow! I believed (as did GIC and Temasek’s advisors) that such opportunities were once in a lifetime and not to be missed. This little red dot of ours would surely prove the whole world wrong!

Buy when everyone else sells; Who dares wins! ( SAS motto- I think)

However, the initial trickle of gloomy financial reports are fast becoming a flood. Jim Roger grieved “to see what Singapore is doing” and now UBS is writing down another US $19 billion! I suspect Roger’s grief may not be altogether sincere as he actually shorted investment banks in Wall Street. Hence he will benefit when these banks’ share prices went south!

Notwithstanding Roger’s true emotions, I have a sinking feeling and am beginning to think that these investments are lemons and that it will take more than my lifetime before we see any positive returns from them.

I am usually a positive-thinking kinda guy who always “looks on the bright side of life”.
But there is very little positive I can get out of this unless you consider telling those smart alecks at GIC and Temasek “I TOLD YOU SO!” as positive.

Honestly I would have preferred that that they proved the pessimists wrong. This possibility is becoming more remote by the day.

Dr.Huang Shoou Chyuan

1.UBS reveals another US$19b sub-prime drama 1 April 2008

ZURICH : Swiss bank UBS revealed a second round of subprime-related write-downs of about 19 billion dollars on Tuesday, becoming the world's worst-hit bank in the US mortgage crisis.

The latest write-down was the biggest single sub-prime hit so far worldwide, and came on top of 18.4 billion dollars (11.7 billion euros) the bank wrote down in 2007.

It will also plunge UBS, the biggest Swiss bank, into a net loss of 12 billion Swiss francs (7.6 billion euros) for the first quarter this year after loss of 4.4 billion Swiss francs in 2007, its first-ever such loss.

The bank also said it wanted to raise 15 billion Swiss francs of new capital, and that it was changing its chairman.

The last write-downs for 2007 had already forced the bank into a controversial rescue recapitalisation by a Singapore sovereign wealth fund and by an unnamed investor in the Middle East.

The overall write-downs by UBS so far of 37.4 billion dollars are far greater than those of American banks Citigroup (21.1 billion dollars in 2007) and Merrill Lynch which has booked 19.4 billion dollars in write-downs. ( read more...)

2.Investor Jim Rogers Says Singapore to Lose Money on U.S. Banks
Reuters 5 Mar 2008

SINGAPORE (Reuters) - Investment guru Jim Rogers believes that U.S. bank stocks could fall further and predicts that Singapore's state investors will lose money on their multi-billion dollar investments in Citigroup and Merrill Lynch.

"I'm shorting investment banks on Wall Street," the long-time commodities bull told reporters on Wednesday at a launch event for ABN AMRO certificates linked to commodities.

"It grieves me to see what Singapore is doing. They are going to lose money," he added, referring to investments by Government of Singapore Investment Corp and Temasek [TEM.UL] in Citigroup (C.N: Quote, Profile, Research), Switzerland's UBS (UBSN.VX: Quote, Profile, Research) and Merrill Lynch (MER.N: Quote, Profile, Research).

Rogers, an American who co-founded the Quantum Fund with billionaire George Soros in the 1970s, now lives in Singapore as he wants to raise his four-year-old daughter in an environment where she can learn Mandarin Chinese.

Rogers, who also writes investment books, said Wall Street had to work off 10 years of excesses and predicted that losses linked to risky mortgages will eventually spread to credit card bills, student loans and other debt.

(Reporting by Kevin Lim; Editing by Jan Dahinten)


Wang said...

Hi Dr Huang

Please remember that they are actually CLS(convertible loan stock) in nature although they are treated as equity for the banks onw accounting purposes. Hence, there is no loss till the actual conversion later as the strike price is still to be determined and basically it is a loan to all such until later.
Unless they entirely collapse(eg Switzerland or USA collapses), in that case everybody runs for cover.All of us will be affected anyway.


nofearSingapore said...

Hi Wang,
I think the Merrill Lynch and Citigroup was a straight equity stake.
I guess GIC/Temasek decided after those two deals that a convertible loan stock was less risky.
But the latest UBS rights issue (to raise capital) will lead to dilution of equity if GIC/Tem does not subscribe to the rights ( ie when they eventually convert to the stock).
If GIC/Tem subscribe to the rights
issue, it may be throwing good money after bad! I don't envy GIC's management. They are stuck between a rock and a hard place.


Wang said...

Dr Huang

As long as there is interest charged eg libor + 3 or 5%(ie Citi and Merrill Lynch, they are not equity although dressed up to look like equity for other purposes.


nofearSingapore said...

Hi Wang,
Merrill Lynch:Stock sale



"Merrill Lynch has confirmed that it has sold shares worth $4.4bn (£2.2bn) to the investment arm of the Singapore government.
As part of the deal, Temasek Holdings also has the option to buy a further $600m of stock in the US bank stricken by the credit crisis by 28 March"

Citigroup: convertible stock

For citigroup's case we don't know if the conversion price is fixed. If it is it will surely be very unattractive as its stock price has fallen so much since the time of the deal!

Wang said...

Dr Huang

Noted the devil is in the details. However, please take note of the right to purchase the additional stock at price to be agreed(ie the interest element). So I am not too concerned unless Merill goes bellyup.


Anonymous said...

When these made good in 2-3 years down the road, soothsayers will say, we told you so. If they turn bad, same soothsayers will say, we saw it coming. Heads they win, tails you lose

Ah Wang

medstudent said...

Dr Huang,

Investing is investing. It makes no difference whose money we are investing. The end game is the rate of return. Our SWFs as the fund managers of our country should know that.

It is too premature to say they are 3 rotten eggs. These companies are the creme da la creme of Wall St and despite all their woes, let me say categorically that they are no Enron or Worldcom. Their abilities to generate strong returns in the last 50 years make them unique in the survival game and i know for sure that, besides the CDO mess, the rest of their business are all cash cows. No one in the right mind will think that they are hopeless tanks.

As they say, no risk no gain. It was correct to invest in these companies. My only concern is the price. Did our SWFs buy at the right price? It is ok to overpay, but not ok to overpay by anything more than double ala HK Kwong Heng Bank (DBS).

If our SWFs are to practice conservative fiscal management by buying into T-bills and such, where is the fun in that??

nofearSingapore said...

Hi medstudent,

I am glad that you have such great confidence in “the fund managers of our country”.

BTW, aren’t these fellas the same ones who did the Shin Corp and Global Crossing deals? Anybody here knows our rate of returns for these investments?

I guess I am in the minority who disapprove of “our fund managers” having some “fun” with our money.
So you think these 3 companies creme da la creme of Wall St are different from other companies?

Are they infallible just because our fund managers have chosen them? Wasn’t Enron also a “must have” in every portfolio in not so distant past?


medstudent said...

Dr Huang,

I do not think u are the minority in disapproval. It seems the online sentiments is of widespread disapproval of our SWFs' deals with Wall St.

With respect to Shin Corp. My take is that Temasek was trying to hold on to it before selling it to SingTel as part of their expansion into regional markets. But inherently, the earnings are somewhat flat for Shin Corp for a number of years and it has prospered only because of Mr Thaksin as the PM. Once he was out of office, the deal went south quickly. It was a bad investment but not disastrous as it was for Global Crossing. Unfortunately, Shin Corp's outlook is as clear as the Thai political scene.

No, UBS & Co are not infallible because we have chosen them. But if the Feds are willing to save tiny Bear Sterns, i am sure Bernacke will do more for Main St. Just look at the quarterly results released recently, UBS has a US$19B loss from CDO, but the net loss is US$17B, which means by all accounts, a business that can generate US$2B in earnings per quarter is certainly not a goner unless UBS decides that it has another $50B in losses in the next quarter. That will perhaps be the final nail in the cofin. But for now, i do not believe all is lost.

nofearSingapore said...

Hi medstudent,

I am a believer in entrepreneurship and will certainly not pour cold water on risk takers.
However, when our citizens funds are involved, I think the catch-phrase should be conservation and prudence.
I initially was glad about how great this would be for Sg, but then the market is telling us that the fund managers are wrong again. If they really are not almost 100% sure- don't use our hard-earned cash for this gamble.
Is all this related to why ERP is always up? GST?
Even insiders tell me they are worried!