"Substantial Long-term Returns" From Bank Investments? Fat Hope, GIC

Well well, things are getting exciting. All of us know that GIC is reported to have incurred losses of US$33 Billion. All of us know that the government keeps on saying that GIC & Temasek are long term investors. And guess what, the press reported that GIC expects long-term returns from its bank investments (and I think, that's what Temasek expects as well)

Singapore’s GIC Loses $33 Billion as Assets Tumble, WSJ Says
By Andrea Tan and Chris Peterson

Feb. 17 (Bloomberg) -- Government of Singapore Investment Corp., one of two sovereign wealth funds owned by the island, lost as much as S$50 billion ($33 billion) in 2008, the Wall Street Journal said, citing two people familiar with the matter.

The fund doesn’t plan to get rid of its investments including in Citigroup Inc. and UBS AG even as asset values plummet, the newspaper said. GIC expects the two banks to provide substantial long-term returns, according to the report.

Sovereign wealth funds in Asia and the Middle East have pumped money into global financial institutions to help replenish capital eroded by writedowns and losses that have topped $1 trillion globally. GIC, overseeing more than $100 billion of reserves, has invested about $18 billion in UBS and Citigroup since December 2007.

And, yes, we also all know what Lim Hwee Hua said in front of parliament on 11 Feb 2009, when she was reporting Temasek's investment losses:

“GIC and Temasek have the ability and resources to weather the ups and downs ... They don’t have to sell in panic in a market downturn and are in fact in an advantageous position to invest in good-quality assets at prices that are attractive from a long-term perspective,”

Well, guess what, that now looks like a big fat hope. The financial press are now reporting that Alan Greenspan is now getting behind the idea of bank nationalisation:

Greenspan backs bank nationalisation
By Krishna Guha and Edward Luce in Washington

Published: February 18 2009 00:06 | Last updated: February 18 2009 00:06

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Just as Greenspan expresses his support for the idea, Republicans are beginning to jump on the nationalisation band-wagon:

Bank nationalisation gains ground with Republicans
By Edward Luce and Krishna Guha

Published: February 17 2009 19:44 | Last updated: February 18 2009 21:57

Long regarded in the US as a folly of Europeans, nationalisation is gaining rapid acceptance among Washington opinion-formers – and not just with Alan Greenspan, former Federal Reserve chairman. Perhaps stranger still, many of those talking about nationalising banks are Republicans.

Lindsey Graham, the Republican senator for South Carolina, says that many of his colleagues, including John McCain, the defeated presidential candidate, agree with his view that nationalisation of some banks should be “on the table”.

Mr Graham says that people across the US accept his argument that it is untenable to keep throwing good money after bad into institutions such as Citigroup and Bank of America, which now have a lower net value than the amount of public funds they have received.

...

Policymakers acknowledge that if this is indeed the case, it will be difficult for those with the largest shortfalls to raise the required equity from the markets, in which case the government would probably have to take temporary control. Moreover, while nationalisation remains taboo in some political circles it is increasingly openly discussed among past and present economic policymakers of all leanings.

“In this country nationalisation of some banks – not the whole banking sector – should be a last resort, but it should definitely now be on the table,” said David Walker, president of the Peterson Foundation and a former senior official in the George W. Bush administration.

The time for biting the bullet may also be fast approaching.

The implications of bank nationalisation are, quite simply, that the government recognises that certain banks are insolvent as private entities, and need to be temporarily controlled and re-capitalised by the government in order to perform the painful restructuring needed to purge the banks' balance sheet of toxic debt and to fix the credit system. This is because the Japanese experience has shown that there is no room for "zombie banks" if Obama is going to pull the ailing U.S. economy out of its morass.

Banks whose failure pose a systemic risk to the financial system, and which are effectively insolvent ('zombie banks') should be the first to be nationalised. Banks like Citigroup and Bank of America would fall into this category. Banks which do not pose a systemic risk but are insolvent, should be allowed to fail. And finally, Banks which were prudent with their lending and are not at risk of insolvency, should of course be allowed to continue operating on their own. Banks like Wells Fargo and JP Morgan fall into this last category.

Of course, two investments held by GIC and Temasek - Citigroup and Bank of America, fall into the zombie bank category. A nationalisation would effectively wipe out the value of equity holders' investments in these banks, and long-term debt-holders will have claims only after the depositors and other short-term creditors are paid off. If these banks get nationalised (I think they likely will), this will mean that the SWFs' investments in them will be wiped out. And that would mean... there is no long-term for GIC or Temasek to talk about!!!

I wonder whether this was what Tony Tan had in mind when he was talking about SWFs having a "reform role for SWFs" - did he mean donating capital to these zombie banks in order to delay their nationalisation??? In retrospect, Dr Tan's comments now look hilarious. LOL

Jan 31, 2009
World Economic Forum in Davos
Reform role for SWFs - They can provide capital to restore financial stability, says Dr Tan
By Alvin Foo

DAVOS - LONG-TERM institutional investors like the Government of Singapore Investment Corporation (GIC) have a key role to play in the reform of the global financial system post-crisis.

That was the message that Dr Tony Tan, GIC's deputy chairman and executive director, delivered to the high-powered annual meeting of the World Economic Forum (WEF) in Davos yesterday.

He said that such investors, which include the world's sovereign wealth funds (SWFs), are important in two ways.

Firstly, they will be important providers of capital to battered financial institutions and companies, now that other key investors - such as highly leveraged hedge funds and private equity funds - have been severely damaged by the crisis.

...

Indeed, sovereign wealth funds, including GIC, have gained a global profile over the past year after ploughing billions of dollars into distressed banks like UBS and Citigroup.

He predicted that these 'real money' investors will play a major role in stabilising the financial system given their large and growing asset bases and their long-term investment horizons.

Dr Tan said: 'This would contribute to stabilising financial and household sector losses, thereby helping to restore both credit creation and demand in the real economy.'

As a result of their larger role as capital providers, GIC and other large investors can, and should, play a key role in designing the new financial system that will surely follow the crisis.