Pearls of wisdom from GIC

April 1, 2009
Singapore Democrats

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Han Ming Wen and Gandhi Ambalam

There is this famous saying in the investment fraternity: “Any fool can make money in a rising market, what separates the men from the boys, is when the market is in a downturn.”

It is easy to be seen as “experienced”, “competent”, and even “brilliant” when your audience is confined within the boundaries of your own kampung, especially when the village chief owns the only loudhailer.

But the truth starts to come to light when the village gets hold of another loudhailer — of the cyber sort. Now that loudhailer that the chief owns becomes less effective.

This is especially obvious over the recent disastrous investment in Citigroup. Going back a couple of years, we were given endless pearls of wisdom by our helmsman Mr Lee Kuan Yew who is also the chairman of the Government of Singapore Investment Corporation (GIC).

“If MM Lee Kuan Yewthere are no wars or oil crises, this golden period can stretch out over many years,” the Minister Mentor said in July 2007. He stressed that it was “an experienced team of ministers [that] is getting our policies set in the right direction.”

Then on 30 Apr 08 Bloomberg reported: “Singapore’s GIC May Seek More Bank Assets, Lee Says” in which MM Lee said: “Government of Singapore Investment Corp. may add more bank assets to its $18 billion of investments in UBS AG and Citigroup Inc. as it chases stable returns over periods as long as 30 years.”

Tony TanFor his part the deputy chairman of GIC, Tony Tan, said: “GIC can still invest in another troubled bank. Whether it would be of the same size as UBS or Citigroup is a matter that has to be decided.

“In the case of UBS, they have a worldwide global wealth management business which is something not replicable by any bank. Citigroup has an international worldwide consumer business which is also unique.”

Dr Tan also pointed out that “notwithstanding their large size, the two transactions have been structured with appropriate downside protection and are within GIC’s risk management parameters”.

He stressed: “Be assured that GIC has and will always invest for only one purpose – to achieve sustainable financial returns for the Government’s assets.”

NoTharman St to be outdone, Finance Minister Tharman Shanmugaratnam told parliament in January last year that the billions invested are “safe”.

Responding to backbenchers’ queries, Mr Tharman assured: “Yes, they’re good, long-term investments with risks thoroughly assessed.

“They (GIC) 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, asking them probing questions.

“Therefore, GIC and Temasek, are not newcomers in this field.”

These words of confidence were uttered hardly a year ago. Now we find out that due to exposure to the crumbling international financial scene, anything between $150 billion to $200 billion of GIC’s and Temasek’s investments have been wiped out.

As of end February this year, Citi’s shares had dropped to $1.50, which means GIC would have lost a total of US$3.7 billion.

But our kampung loudhailer has not broken down.

An article in the London Financial Times quoted a senior GIC official saying: “GIC would only suffer a 24 per cent paper loss on the conversion based on Citi’s closing share price since its stake would be nearly three times the size of the 4 per cent stake it would have received under the original 2008 terms governing the preferred share conversion.”

Ng Kok Song“GIC’s view is that, with this latest move, Citigroup’s capacity to weather the severe economic downturn will be strengthened,” said GIC chief investment officer, Mr Ng Kok Song.

This is where the other loudhailer comes in.

On the conversion of shares, has it not dawned on the GIC that if Citi is nationalized, it will almost wipe out our entire investment of US$6.88 billion? Market speculation is rife that this is appearing to be a reality and it’s only a matter of time before it happens.

Further, if the Kuwait’s sovereign wealth fund is pressured to convert its Citi shares to common shares, then the shareholdings will be diluted even further. It is also likely that there may be an eventual share consolidation. If this happens, what will our holdings be worth?

Next, Citi’s capacity to weather the severe economic downturn will not be dependent on this conversion of shares. The answer lies in the handling of the trillions of dollars of toxic assets that the bank is carrying from (in addition to the subprime mess and the Credit Default Swap) the securitization of credit cards, motor vehicle financing and student loans. These instruments have yet to fully rear their ugly heads. Conversion of these shares only saves the dividends for Citi, which we believe in GIC’s case comes to about US$400-odd million a year.

And as far as the losses incurred from the drop in Citi’s share price as of end February this year, the figure is 46.15%, not 24 %, as pointed by GIC. In real terms that works out to be US$3.7 billion, more than half of what we paid to Citi.

So, where are the structures erected to protect the downside?

The other questions that come to mind are: Why was the Abu Dhabi Investment Authority’s purchase in November 2007 of Citi shares given an 11% coupon rate, while GIC’s in Jan 2008 given only 7%? This is in spite of the fact that credit was more expensive, when the risk premium had increased tremendously, in January 2008 when Citi was in an even more dire state.

Now suddenly these self-proclaimed experienced and competent PAP ministers don’t look so experienced and competent anymore. In fact their loudhailer is becoming more muffled.

If the Establishment can’t or will not keep us informed, we’ll just have to do it ourselves. It’s time that ordinary Singaporeans also purchased their own loudhailers.

Mr Han is a financial analyst and trader. Mr Ambalam is the chairman of the SDP.