OPQ 21 January 2008: Investments by GIC and Temasek Holdings in UBS and Merrill Lynch

This is a very timely issue, given the vast amounts of money that GIC and Temasek have invested in recent months. I didn't file a PQ on this specific issue because Mr Inderjit Singh filed his PQ very early. TODAY's coverage is here.

I guess the upshot is that the jury is out and we will have to assess the wisdom of these investments after more time has passed. I just hope that's not too late.

OPQ

INVESTMENTS BY GIC AND TEMASEK HOLDINGS IN UBS AND MERRILL LYNCH

(Rationale)

1. Mr Inderjit Singh asked the Minister for Finance (a) what is the rationale for the billion-dollar investments by GIC and Temasek Holdings in distressed banks like UBS and Merrill Lynch; (b) whether it was too early to make such investments especially since the full effect of the sub-prime crisis has yet to be quantified; and (c) whether he can assure the House that Singapore will not lose the money pumped into these two banks or its standing internationally.

The Minister for Finance (Mr Tharman Shanmugaratnam): Mr Speaker, Sir, Mr Inderjit Singh asked about the rationale for recent investments by GIC and Temasek in UBS and Merrill Lynch respectively, and asked whether it is premature to make such investments when the full effects of the sub-prime crisis have yet to be quantified.

Let me first state that GIC and Temasek make their investment decisions independent of each other, and of the Government. They make these decisions for commercial reasons, based on their own calculations, free of any influence from Government.

GIC has explained the reasons why it made a major investment in UBS, and more recently in Citigroup. Likewise, Temasek has stated why it invested in Merrill Lynch. The US subprime crisis has resulted in several global financial institutions facing large writedowns of their assets, and requiring fresh capital. This has presented opportunities for investors that are liquid, and able to take a long term view. GIC and Temasek were among those approached. They assessed the proposals rigorously. In each instance, GIC and Temasek concluded that these were good, long term investments and valuable additions to their overall portfolios. They considered each of the banks as having a strong business franchise and good long term growth potential, across multiple businesses and multiple locations. Hence, they negotiated terms which protected their interests and made financial sense, and entered into the deals.

These are large investments. As with all commercial investments, there will be some downside risk. It is up to GIC and Temasek to assess this risk, and decide if it is acceptable. Their responsibility is to accept prudent risks in order to earn good returns on their overall portfolios. It is not the Government’s role to comment on or second guess whether it was timely for GIC and Temasek to have made these two investments. It does not judge the performance of GIC and Temasek by their individual deals. Nevertheless, the Government is assured that both GIC and Temasek had thoroughly assessed the risks of each these investments, and had made hard-headed commercial decisions after careful assessment of the risks and the prospects for returns over the long term.

Mr Inderjit Singh (Ang Mo Kio): Sir, in July last year, Temasek invested a few billion dollars into Barclays Bank. I think it was around $3 billion minimum and up to $7 billion, if I remember correctly. From what I understand, these values have now come down to about half of the value of investment. Is the Minister not worried that if GIC and Temasek continue with this kind of multi-billion dollar investment all in one sector - in the banks - this could quickly wipe out a significant portion of our reserves?

Mr Tharman Shanmugaratnam: As I have mentioned earlier, it is important for Government to retain its stance of not assessing Temasek and GIC on individual deals. They are institutions which are tasked with earning us a good long term return and they will have to do so by assessing the risks of each transaction as well as the risks of their whole portfolio thoroughly, rigorously and regularly. Each deal will come with its own risks and each deal adds risk to their overall portfolios, and the two institutions go about analysing this with considerable care. They do not just look at the risks inherent in each deal but also how the risks correlate with the rest of the portfolio because risk-correlations are a very important component of the overall risks of a portfolio.

They go about this thoroughly and rigorously so as to be able to assure themselves that they will be able to provide Government with a good long-term financial rate of return. We have to leave this to them - timing, the decision as to whether to invest, how to protect themselves in each investment, as GIC and Temasek have indeed done in each of these large deals, they protected themselves from downside risks to the extent that is possible, and how to manage a diversified portfolio even as they enter into some large deals from time to time. We have to leave it to them to do as they judge best.

Mr Inderjit Singh: Sir, I understand that we need to let both institutions manage their investments but since both of these institutions report to the Ministry of Finance, should not the Ministry of Finance lay down some broad guidelines without micro-managing both of them? For example, in the case of the Barclays Bank, it was an equity investment and we lost a lot of money. In the case of the investment that GIC made, it was a convertible bond and it looks like a relatively safe investment. While we do not want to micro-manage, the Ministry could perhaps lay down broad guidelines within which they can operate.

Mr Tharman Shanmugaratnam: That is a useful question. Indeed we do have an understanding with both GIC and Temasek as to the Government's overall risk tolerance. In the case of GIC, it is our funds which the GIC is managing as a fund manager. So the Government sets the risk tolerance, for instance, how much risk you are willing to take and how much risk of a downturn or reduction in the value of your total assets that you are willing to absorb over a certain period of time. In the case of Temasek, we are a shareholder and they own the funds, they set their risk parameters but they do so in the context of an understanding with the Ministry of Finance as to what is an expected return that we should hope to derive over the long term.

This is not a situation where we are completely hands-off, we do not have our eyes on the ball at all, but we are scrupulous in avoiding comment or influence, not just publicly but even internally, on the individual decisions of Temasek and GIC. I think that is the right balance.

Mr Siew Kum Hong (Nominated Member): Sir, I would like to ask the Minister to clarify when he mentioned that the Ministry is assured that GIC and Temasek have appropriately evaluated the risks. As I understand it from the papers, the GIC's investment in Citigroup was done in eight days. I would like to ask the Minister to clarify exactly what due diligence measures were taken by GIC within that very short period of time?

Mr Tharman Shanmugaratnam: I do not think it is appropriate or useful for the Government - and I am repeating myself here but it may be useful to do so - to get involved in the risk assessment and investment decision on any one transaction. Over a period of time, if we notice that either GIC or Temasek has not been earning the return they expected and has been making rash decisions repeatedly as evidenced by what happens after the fact, then of course we would want to engage with them on a much closer discussion on their risk management procedures. This has not been the case so far because they have been doing well consistently over the long term and we have no reason to believe that there is anything suspect or wanting in their risk management procedures.

Some of you may have read Mr Ng Kok Song's interview with the Straits Times today. I read it with great interest this morning. It was a translation, I suspect, from a Swiss newspaper. He explained this matter of how many days it takes and it may even have been less than eight days from his account. GIC and Temasek are not newcomers in this field. In the case of the GIC's transaction, they have been in the financial markets for years. Even for the purpose of their small investments, as part of portfolio diversification, whether it is in Citibank, UBS or many other global financial institutions, they have a team of people who are watching these institutions continuously, studying the financials, doing counter-simulations, interacting with the senior management of the institutions and asking them probing questions. They are not new to Citibank or UBS and they are not new to financial institutions. They come in ready. So when a proposition is made to them, they know how to look at opportunities in a timely fashion, knowing also that opportunities have to be taken in a timely fashion.