Temasek's Performance - A Dismal Failure of Singapore's Elitism

Government officials and Temasek executives have repeatedly held the line that Temasek's portfolio performance should be evaluated, not simply the performance of individual investments. It is thus no surprise that Temasek's latest unveiling of its recent portfolio performance has come under intense scrutiny, not just by Singaporeans, but by financial analysts all over the world.

This morning, the press reported a 31% drop in the market value of Temasek's portfolio from March 08 to Nov 08. Under rigorous enquiry about the performance of Temasek, government officials retorted that Temasek's performance has been 'respectable' compared to the performance of global investment indices, such as that of the MSCI world index.

Indeed, Temasek may have a case that its performance, relative to world indices, is respectable. The MSCI world index has crashed a whopping 40% since March 08. However, it is extremely unfortunate that Temasek, which prides itself on offering scholarships to Singapore's 'best and brightest', and hiring top foreign talent, is benchmarking its performance to the average performance of the rest of the world. Temasek's only defence is that it is 'above average.'

Temasek's executives and Singapore's politicians, instead, should be benchmarking Temasek's performance to the best and brightest in the world. If indeed Temasek has top talent, its performance should be comparable to the top fund managers. But the truth is, Temasek is no where near the top. In comparison to the best performers, its performance is a dismal failure.

In late 2007, Bloomberg made the following report:

Paulson Housing Bets Make $2.7 Billion

By Anthony Effinger

Nov. 29, 2007 (Bloomberg) -- The subprime crisis that's caused so much trauma for hedge funds and investment banks has brought only good news for John Paulson. He's the manager of more than $7 billion in hedge fund money keyed to mortgage credit.

Paulson started warning his investors back in the middle of 2006 that the frenzy to build and sell housing was a bubble about to pop. His New York-based firm, Paulson & Co., made big bets predicting the edifice would soon come crashing down. The wager paid off in the first nine months of 2007, when Paulson's Credit Opportunities funds rose an average of 340 percent.

That gain earned Paulson an estimated $1.14 billion in performance fees for the nine months ended on Sept. 28. Fees on Paulson's other eight funds bring his total to $2.69 billion, which puts Paulson and co-manager Paolo Pellegrini at the top of Bloomberg's ranking of best-paid hedge fund managers. John Paulson is no relation to Treasury Secretary Henry Paulson, the former chief executive officer of Goldman Sachs Group Inc.

Next on the list is Philip Falcone, whose New York-based Harbinger Capital Partners also bet against the housing boom and collected incentive payouts of $1.3 billion for the same nine months. In third place was Jim Simons, president of Renaissance Technologies LLC in East Setauket, New York.

Indeed, Temasek cannot say that "no one saw it coming." John Paulson and others did - they saw the excessive leverage, lax lending standards, and mispricing of credit risk in the markets - and took bets against the credit markets that paid off handsomely.

The following statement was by hedge fund manager John Paulson, in his statement to the US House of Representatives in November 2008:

"In 2005, our firm became very concerned about weak credit underwriting standards, excessive leverage among financial institutions and a fundamental mis-pricing of credit risk. To protect our investors against the risk in the financial markets, we purchased protection through credit default swaps on debt securities we thought would decline in value due to weak credit underwriting. As credit spreads widened and the value of these securities fell, we realized substantial gains for our investors."

The best and the brightest brains saw the credit crunch coming, and Temasek did not. Indeed, not only did Temasek not see the crunch coming, it went long the credit markets in 2008 - by making massive bets on financials like Merrill Lynch and Barclays. As a result, it made massive losses as the banks further imploded.

Well, even if Temasek didn't short the credit markets, it could have at least avoided making the stupid investments in the investment banks, just as Warren Buffett sat on the sidelines. But instead of just doing nothing, Ho Ching and company just had to get their hands itchy.

Meanwhile, the best and the brightest continued to do what they did best - and make money. To add on to the $1b+ in fees he earned in 2007, John Paulson continued his winning streak in 2008, by continuing to bet against the credit markets and financial institutions - bets that were directly opposite to Temasek's:

John Paulson’s Funds Shine in the Gloom

While his counterparts at other big hedge funds are trying to figure out whether they can stay in business, the fund manager John Paulson continues to rack up enormous profits. DealBook has obtained Mr. Paulson’s confidential year-end letter to his undoubtedly gleeful investors.

The 20-page report details how Mr. Paulson’s firm, Paulson & Company, which manages nearly $29 billion in assets, avoided the huge losses plaguing other funds, and it gives his firm’s outlook for this year.

Paulson Advantage Plus, the firm’s largest fund with roughly $7 billion in assets, returned a whopping 37.6 percent net of fees for 2008. Another version of the fund, which does not use borrowed money to amplify its return, recorded gains of about 24 percent, according to the letter.

Most of the profit in the Advantage group of funds came from betting against a number of financial institutions. At the beginning of 2008, the Paulson firm sold short several large financial stocks including Fannie Mae and Freddie Mac, correctly predicting that they would either become insolvent or need to raise additional capital that would significantly dilute shareholders.

On the downside, the Paulson firm said its long portfolio focused on sectors that generally do better during a recession, including health care, utilities and consumer staples. But nearly every one of those positions declined in value, although less than the overall stock market.

Mr. Paulson is still bearish on the economy going into 2009 and remains short financial stocks and slightly short of the equity markets in general.

“As the credit crisis has spread beyond subprime, all credit categories are experiencing higher losses, threatening the solvency of many additional financial institutions,” Mr. Paulson said in the letter. “The problem with many banks is that they don’t have enough tangible common equity to absorb anticipated losses.”

Temasek really has no excuse. It pays millions in compensation to its management every year. It is supposed to be staffed by the smartest investment minds out there. But its performance during this credit crisis has been, quite simply, mediocre. If we compare the 2008 31% loss in Temasek's portfolio to Paulson's whopping 37.6% gain - thats a net difference of 68.6%. Temasek has underperformed what should be its benchmark by a whopping margin!

Indeed, what we have isn't a bunch of particularly smart people at Temasek - what we have is a bunch of people suffering the curse of group think, of people mindlessly following the advice of their stock analysts - unable to truly see what is happening. What has happened with Temasek's investments should make clear to Singaporeans that there is really no such thing as the "elite" as defined by Singapore's "top brass" - they're just ordinary, mediocre investors - like you and me.

And the sooner Singaporeans realise that, the better. If we did, we would have had a decent chance of avoiding the disastrous capital destroying investments in Shin Corp, Merrill, Barclays and ABC learning. And we'd be billions of dollars more well off as a nation, than we are today.

Bank of America / Merrill Lynch Watch (Feb 09)

Ho Ching announced her retirement last weekend. This blog post tracks one of the disastrous investments that she will leave behind at Temasek. Good luck, Chip Goodyear. You're going to need it =)

For Bank of America and Merrill Lynch, Love Was Blind (NYT) "But the merger, in which Bank of America agreed to pay about $50 billion in stock for Merrill, soured at light speed. Back then, the combined companies would have been valued by the stock market at about $176 billion. Today, the combination has a market capitalization of only $39 billion."

“When you go into a deal, you hope for the best but expect the worst,” says Nancy Bush, a banking analyst. “I think Bank of America did plenty of due diligence; they just ignored what they found. They knew it was there. They just didn’t completely grapple with the fact that it could get uglier. And it did.”

Bank of America CEO Close to the Edge (Reuters) "This guy's job is on the line, and he knows it," said Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. "He's trying to outrun the recession, and praying things will be better in the second half of the year. It's going to be a slow process, but given the mistakes Ken has made, it will be difficult for him to keep his job during the year."

Bank of America Merrill Lynch Bleeds Top Talent - More Bad News for a Disastrous Temasek Investment

In latest news, Deutsche Bank has hired 12 of Merrill Lynch's top bankers into its FIG (Financial Institutions Group). This news is the latest in a string of bad news to hit what must now be considered a disastrous acquisition for Bank of America, and a horrendous investment for Temasek Holdings:

Deutsche Bank Significantly Expands Global Financial Institutions Coverage

2009-02-04 01:06:01 -

Deutsche Bank today announced 12 new hires in the firm's Financial Institutions Group in its Global Banking division. The additions comprise six Managing Directors as well as a number of Directors, Vice Presidents and Associates, focused on banks and asset management client coverage. The new hires will be located in New York, London and Hong Kong.

The Minibonds / High Notes Fiasco: Who Should Bear the Blame???

As we all know, the subprime fiasco which originated in the United States has seen its hand of carnage stretch beyond the boundaries of physical geography and slap several hundred Singaporean "investors" in the face to the tune of millions of dollars in losses. And of course now that the financial weapons of mass destruction have detonated, the casualties of this “economic pearl harbour” are scrambling to apportion the blame to other parties, in hopes that they can get some sort of money back. Meanwhile, those involved in the long chain of origination and distribution of the toxic financial instruments are of course making sure that none of the blame falls on them, and the way to do that, is to blame someone else, of course.

In the midst of this clown show, which are the parties involved and what blame can you place on them, in order to avoid taking personal responsibility? Here’s my take on this comedy of errors:

Lenders

Several US lenders made questionable loans during the period of a housing bubble to borrowers of questionable credit-worthiness. Many of them did this in an attempt to "flip" the loans off their balance sheets using credit derivatives and other instruments, and in the process earn fees. While this method of churning loans made money while the credit markets remained buoyant and while the housing market stayed in the clouds, it soon turned sour once the housing market turned on its head and the credit markets imploded, leaving the lenders stranded with bad loans on their balance sheets.

VERDICT: Greedy lenders have to take the blame for lending irresponsibly. Several have suffered the ultimate penalty by going bankrupt

Mortgagees

And of course there are a whole bunch of mortgagees who took out loans they could not afford in order to buy property that was over valued and which should never have been bought. The heady prospect of flipping a piece of property for several thousand dollars in profit drove many speculators to launch the housing market into an unsustainable bubble, which ultimately burst, leaving the borrowers deep in debt with real estate which could only be sold at a steep loss.

VERDICT: Irresponsible borrowers took out loans they could not repay in order to speculate on the property market. These mortgagees over-leveraged and paid the penalty by losing out big time on their investments.

Congress

Right now, politicians are trying to say all the right things to convince the people that the financial crisis is all the fault of those greedy irresponsible bankers. But of course they forget that Fannie Mae and Freddie Mac were actually commissioned by congress itself, and of course they won’t tell you that while Fannie Mae officials were trying to tighten lending standards, it was Congressmen who were berating them for “impeding the American dream.”

VERDICT: Idiotic politicians who did not understand finance encouraged irresponsible lending, in the name of allowing every American to own their own home - lovely rhetoric, but financially very dumb.

Investment banks

These guys are the ones we all love to hate. The man on Main Street loves to point the finger at the Wall Street banker who is drawing a multi-million dollar salary. And now that several Wall Street institutions have crashed and burned, plumber joe is rubbing his hands with glee.

And yes, many of these Wall Street dudes were irresponsible in their actions. Their creativity and ingenuity drove the credit market to new heights, setting it up for the most spectacular crash this century. They hived toxic investments off to unsuspecting investors. They created complex, labyrinthine financial instruments which people could not understand in order to transfer risk to unsuspecting parties.

VERDICT: Greedy bankers created and sold some of the most complex, toxic financial instruments the world has yet to see, all in the name of greater fees and bigger bonuses! And now, several of the banks have been wiped off the face of the earth, into the realm of history.

Local banks and brokerages

And where did the instruments originated by the investment banks go? In order to reach the Ang Mo Kio investor, it had to be distributed through the local financial institutions. These local institutions, of course, attracted by the commissions they would earn when they sold the products to investors, pushed their burden of responsibility to regulators to give the okay to investors.

Of course they didn’t understand the real import of what they were doing, but who cares about that when there’s money to be earned?

VERDICT: Greedy bankers and brokers closed their eyes and gleefully collected commissions in the process of distributing the products to their clients. If Daddy MAS says the products are okay, then they are okay. Yippeeee!!!!

Relationship managers

Ha ha ha. No surprise why these guys have been called relationship damagers. They coaxed, cajoled, manipulated and deceived their clients into buying products which should never have been touched by the man on the street. And now, this breed is one of the most reviled in Singapore society.

VERDICT: Unethical relationship managers sold the financial products without really understanding them. And now many of them are facing the axe, in addition to the ire of angry investors

Regulators

Regulators, of course, truly had no idea what the substance of those credit instruments really were. For goodness sake, it takes Mathematics PhDs to really understand the ins and outs of those instruments. Did MAS hire these guys to thoroughly analyse the products before approving them? I seriously doubt so.

VERDICT: The regulators didn’t really have the expertise to understand the instruments they had approved. They should instead have left it off the approved investment list

Investors

You didn’t seriously think I would leave the investors who actually purchased these derivative instruments blame-free, did you? Ha ha. Guess What? Caveat Emptor. Most of these investors didn’t take the effort to really understand what they were getting themselves into. Many didn’t bother to read the investment prospectus, and even if they did, never really took the time and effort to realize that they should not be anywhere the minibonds, high notes and other similar instruments. More on this? Read here.

The Perfect Chain

As you can see, it takes a "perfect chain" of irresponsible acts to result in the financial Chernobyl that has come to pass. All it took was one responsible individual to break the sequence of events. But strangely, all those involved behaved more or less in the same way.

If you are any one of the abovementioned parties, I have now given you ammunition to blame everybody else except yourself.

I hope you all have lots of fun playing the big blame game!!! =)

Why Regulation for Minibonds...?

In one of the latest developments in Singapore's Minibond saga, Tan Kin Lian, champion of the burnt minibonds investors, has released a request for proposals to lawyers for services for collective legal action by the minibonds investors against the bankers and brokers who sold them the minibonds products.

Also, the 84-page minibonds prospectus is available on the TOC website, here. A brief browse into the contents of the prospectus reveals some interesting information. On page 17, under "Risk Factors," we see:

Risks relating to the nature of the Notes

Suitability of the Notes

The purchase of the Notes involves certain risks including market risk, credit risk and liquidity risk. Investors should ensure that they understand the nature of all these risks before making a decision to invest in the Notes. In addition, on the occurrence of a Credit Event (as defined herein) in respect of a Reference Entity, Noteholders could lose all or a substantial part of their investment in the Notes. This Base Prospectus and the Pricing Statement are not and do not purport to be investment advice. You should conduct such independent investigation and analysis regarding the Notes and the other assets on which the obligations of the Issuer under the Notes are secured as you deem appropriate. You should make an investment only after you have determined that such investment is suitable for your financial investment objectives. You should consider carefully whether the Notes are suitable for you in light of your experience, objectives, financial position and other relevant circumstances.

From the outset, the prospectus explicitly states several important points for that investors should do and take note of:

Noteholders could lose all or a substantial part of their investment in the Notes.

It also clearly states,

You should conduct such independent investigation and analysis regarding the Notes and the other assets

In one paragraph alone, the prospectus clearly instructs the investor in what are sound principles of investment analysis. Always do your own homework (independent investigation and analysis).

Ultimately, then, the investors who bought the minibonds cannot fault Lehman brothers with the argument that they depended on the RMs to advise them, as Lehman had clearly stated in the prospectus that the investors need to do their own independent analysis.

So the problem, then, are the RMs & brokers guilty of anything? The investors claim they were deceived and misplaced their trust in the advisors who sold them things they should not have been investing in.

That, my friends, is why regulation is needed - NOT because of some supposed higher cause of justice, but instead to prevent idiots from destroying their retirement accounts with their own stupidity, and also to prevent un-ethical misrepresentation of securities by financial 'advisors'

The government also can't really be faulted... because the RMs had a duty to inform the 'investors' that they had to do their own homework. This was not the government's responsibility.

Hence, the best way to protect yourself is to just automatically adopt the attitude that one must do his own homework. And if you find that you do not understand what you are analysing, just stay away. Abdicating the responsibility of investment analysis to someone else is a sure recipe for disaster. If the 'investors' (aka fools) had actually bothered to adopt this principle, they would not have been misled by the RMs.

Don't be a fool. Don't let ignorance destroy your retirement account. The best way to protect yourself from fraud is to do your own homework!!!

SingTel's OpenNet Wins NGNBN NetCo Bid; Biggest Loser to be StarHub

OpenNet recently won the NetCo segment of the NGNBN. The consortium comprised Canada's Axia NetMedia, and Singapore's SingTel, SPH and Singpower Group. Although it might have been painted as a close "two-horse" race, I doubt if there were ever any questions as to who was going to win the bid. With the government putting up $750m to fund the NGNBN NetCo passive network, it could not afford to place its bets on the Infinity network, which would have faced stiff, cutthroat competition from SingTel, had the latter not won the tender.

And now that SingTel's consortium has won the bid, the long term outlook for StarHub doesn't look pretty. StarHub's franchise lies with its cable network and its strong programming line-up. It keeps customers and prevents churn by using its exclusive cable infrastructure to tighten its stranglehold on the telecoms market with strong triple & quadruple play packages.

But with the advent of the new NGNBN structure, StarHub will see this competitive advantage starting to erode. The open-access fibre infrastructure gives SingTel the advantage now. Despite holding only a 30% stake in OpenNet, SingTel has a huge revenue-share stake in OpenNet's revenues, due to its lease structure agreement with the newly-formed infrastructure company.

Furthermore, we can expect SingTel to move swiftly to rollout the new infrastructure and to start selling next-gen services in this market. The competition will force StarHub to lower prices on its cable franchise in order to prevent churn to the new SingTel fibre offerings. But that will be difficult, considering SingTel's assault on Starhub's cable network, most recently exemplified by MioTV's win of the Champions league broadcast rights.

Add to that SingTel's stranglehold and dominance over international internet gateways coming into Singapore (just try accessing youtube at peak hours over starhub and singtel, and you'll see the difference), and StarHub's cable internet is likely to suffer in the long run.

With the prospect of pricing pressure and heightened competition, Starhub doesn't look like the best stock in Singapore's telecom landscape. Furthermore, the company is almost exclusively focused in the Singapore market, unlike SingTel which has diversified investments in emerging markets overseas. Starhub will have to move quickly to reinvent itself in the light of latest developments, or it may continue to see its stock decline.

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[IDA] Selects OpenNet Consortium as its Network Company

By Anshu Shrivastava
TMCnet Contributing Editor

Axia NetMedia has announced that Infocomm Development Authority of Singapore (IDA) has selected the OpenNet consortium as its Network Company (NetCo).

As per the contract, OpenNet will provide passive fibre grid services for Singapore's Next Generation National Broadband Network (NGNBN).

Back in May, the company announced it entered into an agreement creating the OpenNet consortium. This OpenNet proposal is for the rights to provide passive fibre grid services throughout Singapore. The second is for the rights to provide the active Real Broadband services over the fibre grid.

At present, Axia has a 30 percent interest in OpenNet, while SingTel, Singapore Press, and SP Telecommunications taking up the remaining interest with 30 percent, 25 percent and 15 percent share, respectively.

“OpenNet's approach is future-proof with no compromises from either the technology or business structure perspectives for the passive segment of the network,” said Art Price, chairman and CEO at Axia NetMedia.

He also said in a statement that Axia now has references for the best in class next generation network (NGN) solutions for rural, regional and metropolitan communities. Based on open access no conflict principles, OpenNet plans to create the NGN solution.

According to the company, a key component of the solution involves OpenNet acquiring access to existing infrastructure through usage fees that vary with the market adoption of OpenNet's services.

OpenNet expects to complete the agreement contracting process with the IDA as planned, within the next seven months and expects that the Singapore-wide fibre grid will be completed by June 2012.

The company believes that when completed, OpenNet will provide Singapore with a “truly open, better and faster fibre-to-the-home network.”

This announcement is the first part of IDA's RFP process for a complete NGNBN. IDA said that the second part is the provision of active broadband services over the fibre grid.

Ken Lewis is Confused - BoA's Investment Banking to Remain Second Rate, even with Merrill Acquisition

“Merrill was paying typical Wall Street pay... We intend to pay market instead.” - Ken Lewis

Ken Lewis, CEO of Bank of America, has gone on the record making the statement above. And while this statement may seem to make sense to some, it really betrays Ken's confusion and fundamental lack of understanding about Wall Street and the investment banking business.

Mr Lewis seems to imply that there is a difference between "typical Wall Street pay" and "market pay." But While Merrill Lynch gives generous pay packets to its bankers and other staff, this WAS market pay - for the investment banking business. That's why it was typical. Typical Wall Street Market Pay!

But you see, Ken Lewis really didn't mean to say he intended to "pay market," because "paying market" means paying "typical Wall Street pay." What Ken Lewis really meant was this - We intend to pay "commercial bank pay". After all, that's what BoA has been, is, and will continue to be, predominantly - a huge lumbering commercial bank, and a second rate investment bank. Acquiring Merrill isn't going to change that, and here's why:

Paying investment bankers commercial banking pay, is simply going to see the investment bankers either:

1. leave for other bulge bracket banks which are going to continue paying wall street market pay, or


2. see them leaving to start their own corporate finance advisory houses and/or join other boutique investment banking shops, or


3. leave to start their hedge funds and/or private equity shops

Indeed, that's why we see what's going on today: top Merrill talent is already being snapped up by its competitors. Banks like Barclays, Goldman Sachs and Morgan Stanley are swooping in like vultures to scoop up the talent that has been wounded by Ken Lewis' foolish rhetoric. I mean, what would you expect the investment bankers to do when their egos are hurt by Ken Lewis' statements saying that he hates Wall Street's inflated pay?

That's why Lewis' cost cutting strategies with Countrywide and FleetBoston are going to fail miserably when he applies the same to Merrill. Merrill is NOT a commercial bank where the bargaining power lies with the bank and cost-cutting is the way to go. Merrill is primarily a relationship business where its most important assets are its people. And as Lewis will learn in time to come, your business goes out the door when your most important assets go out the door. And your assets go out the door when your bankers and brokers go out the door.

Commercial banking is fundamentally different to investment banking, and Ken Lewis doesn't get that. That's why BoA is going to continue to have a second rate investment banking franchise. And that's why, in the years to come, we're going to see write-downs on Lewis' ill considered and ill executed acquisition.

Good luck all you BoA shareholders. You're going to need it =)