Elena Logutenkova & Yalman Onaran
It took the Government of Singapore Investment Corp. three days in 2007 to agree to prop up UBS AG, ailing from subprime losses. It may take a decade to recoup that investment of 11 billion Swiss francs ($10 billion).
GIC, manager of more than $100 billion of the city-state’s foreign reserves, faces a paper loss of about 5.6 billion francs when it becomes the biggest shareholder of UBS on March 5, as shares of Switzerland’s largest bank trade at a third of the conversion price on notes it holds.
Singapore isn’t alone among sovereign wealth funds facing losses from supporting banks in Europe and the U.S. in the credit crisis. More than $69 billion in investments by such funds has so far produced $20 billion in realized and paper losses, according to data compiled by Bloomberg. Hurt by their contributions to the health of the financial system and stuck with some of the investments for years, sovereign wealth funds may shy away from coming to the banks’ aid the next time.
“Once burned, twice shy,” said Charles Whitehead, a finance law professor at Cornell University in Ithaca, New York, who has tracked the strategy of such funds. “If a weak bank came back to them again for capital in the next crisis, the sovereign wealth funds won’t be there.”
European and U.S. bank chiefs made personal pitches to the funds during the height of the mortgage market meltdown. Marcel Ospel, then chairman of Zurich-based UBS, called GIC Chief Investment Officer Ng Kok Song, according to comments they made at the time. Talks began on Dec. 6, 2007, and by the evening of Dec. 9, GIC had committed to make its biggest single purchase at the time.
Acknowledging that recouping the money might take longer than initially expected, Ng said in GIC’s annual report, published in September, that he still has “confidence” in the “long-term prospects” of the investment.
GIC, which declined to comment for this article, will receive 230.7 million UBS shares for its mandatory convertible notes this week for 47.68 francs each. UBS shares closed yesterday at 14.98 francs.
“The game turned out not as easy as it may have seemed,” said Florian Esterer, who helps manage about $55 billion, including UBS shares, at Swisscanto Asset Management in Zurich. “It will take probably more like a decade than three years” for UBS shares to return to 2007 levels.
Qatar, Abu Dhabi
There were some profitable deals too, such as Qatar and Abu Dhabi funds that waited until the depth of the crisis to invest in London-based Barclays Plc and Credit Suisse Group AG of Zurich. Yet one third of the winnings, which totaled $12 billion, resulted from a regulatory change rather than timing.
After the U.S. government required troubled banks to have more common equity instead of weaker tiers of capital, Citigroup Inc. had to offer favorable prices for its preferred shareholders to convert to common. That led to windfall profits of $4 billion for Kuwait and GIC on investments that would have lost $9 billion under their original agreements.
Abu Dhabi Investment Authority didn’t benefit because it didn’t buy preferreds when it came to the aid of New York-based Citigroup. So it may face a $4.8 billion paper loss when it is forced to convert its so-called equity units to shares starting this month at a price almost 10 times higher than the current value. Abu Dhabi filed an arbitration claim against Citigroup, which has the most writedowns and losses from the credit crisis, alleging the bank wasn’t forthcoming about its financial health when it was seeking capital. In a December statement, Citigroup said the claim is “without merit.”
A spokesman for the Abu Dhabi Investment Authority declined to comment.
More due diligence
“One lesson that all investors, including the sovereign wealth funds, learned from this crisis is that you have to do the due diligence before investing,” said Rachel Ziemba, a senior analyst who tracks such funds at Nouriel Roubini’s RGE Monitor in New York. “The funds are already looking at fundamentals more closely. They’ll be more wary to take such big stakes in banks in the future.”
The funds’ banking investments in the crisis diverged from their traditional strategy of taking smaller stakes in an array of companies, Ziemba said. The diverse distribution of stakes in close to 100 firms in the U.S. that the China Investment Corp. revealed in a regulatory filing last month is proof that they’re going back to their original goals, she said.
CIC, Morgan Stanley
In June, CIC increased its investment in New York-based Morgan Stanley by $1.2 billion, even though its first purchase was out of the money by about $2 billion on the $5.6 billion it put in the Wall Street firm. The fund took part in Morgan Stanley’s sale of new shares, saying it expects the investment bank to become more competitive. The equity units CIC bought in 2007 will convert to stock at $48 in August. Morgan Stanley shares closed yesterday at $28.19. CIC declined to comment.
Sovereign wealth funds tend to support the companies in which they had invested in times of need, said Nuno Fernandes, professor of finance at IMD Business School in Lausanne, Switzerland, who has been studying the funds. Still, the recent losses “had huge implications internally, and the funds were criticized by their local constituencies. They will invest less in financials going forward.”
Temasek Holdings Pte, a separate Singapore government fund that oversees more than $120 billion, sold its shares in Charlotte, North Carolina-based Bank of America Corp. for a $4.6 billion loss in early 2009. It had acquired the stock during the conversion of its stake in Merrill Lynch & Co. when the investment bank was bought by Bank of America.
After the initial round of investments by the sovereign wealth funds in late 2007 and early 2008, banks and brokers announced more losses on their mortgage assets. And they kept going back to investors for more money. The dilutions since then and the losses — $1.25 trillion worldwide — may make it difficult for some bank shares to recover to 2007-08 levels.
In the two years following GIC’s investment, UBS’s writedowns and losses from the credit crisis swelled almost threefold to more than $57 billion. UBS boosted the number of its shares by 98 percent since the end of 2007. Citigroup’s share count jumped almost six times in the same period.
After UBS’s capital raising was announced on Dec. 10, 2007, it drew criticism from other shareholders. Profond, a Swiss pension fund, said it was treated unfairly by the bank because it wasn’t offered the same deal, which included a 9 percent interest payment on the mandatory convertible notes sold to GIC and an unidentified Middle Eastern investor. Swiss tabloid Blick christened UBS the “United Bank of Singapore.”
“The majority of people at the end of 2007 expected this crisis to be a lot less severe than it in the end turned out,” said Dirk Hoffmann-Becking, a London-based analyst at Sanford C. Bernstein Ltd.