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.

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 =)

Singapore's SWFs and the 3 Behemoths of Mass Implosion

What do UBS AG, Merrill Lynch and Citigroup have in common?

A. They're all banks which have received significant cash infusions from Singapore's Sovereign Wealth Funds, GIC and Temasek.

B. They're the 3 largest casualties of the ongoing credit crisis.

Behemoths of Mass Implosion

Meredith Whitney, one of the most prominent Wall Street bank stock analysts, recently put out research notes either downgrading or cutting financial estimates for the three banks:

Merrill, rated “underperform,” faces “headwinds of deleveraging and the next disruptive step of restructuring.” ...

Ms. Whitney says she continues to “be negative in our outlook on Citigroup due simply to the fact that the company has seriously constrained earnings power, in addition to the writedowns seen in 2Q08,” which she estimates will hit $12.2-billion. ...

UBS is rated “underperform” by Oppenheimer because the Swiss bank “faces a difficult task of navigating through its risk exposures from the investment bank and rebuilding its damaged wealth management franchise.”

Whitney's pessimisim is not without good reason. UBS AG, Citigroup and Merrill Lynch, have been the banks with the largest total bank writedowns to date, far and ahead of the rest of their peers:

Citigroup leads the pack, with UBS and Merrill trailing close behind. But the gap between these three banks and the rest is extremely large - HSBC is the next closest with about half of Merrill's damage.

The same three banks lead in another key statistical metric: writedowns/market cap ratio:

This time, Merrill leads the charge. UBS and Citigroup fare better on this ratio, but still are way higher than the rest of the pack.

The stock markets have, in turn responded to the financial carnage the banks have inflicted on themselves: Merrill, Citigroup and UBS are amongst the top 5 % decliners in stock price:

Meanwhile, the 1-year performance of the stocks have indeed been nothing to envy:


The Dubious Wisdom of Lee Kuan Yew

Lee Kuan Yew just a month ago made some comments about GIC's splendid investments in Citigroup and UBS:

"The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again ... Will there be another Swiss bank like UBS for wealth management? I doubt it, we doubt it, that is why we invested in it." Citigroup, he added, had "an enormous spread worldwide as a retail bank".

These statements have indeed turned out to be questionable, if not downright wrong. UBS' 'unparalleled' wealth management franchise appears to be undergoing an unparalleled tax evasion investigation:

UBS shares hit by talk of further losses, tax evasion case
Jun 23, 2008

ZURICH (AFP) — Shares in Swiss banking giant UBS plunged on Monday amid talk of further losses and as investors worried that a US tax evasion case around a former employee could widen to the bank itself.

At the close, UBS shares showed a fall of 4.42 percent to 22.06 Swiss francs on the Zurich stock exchange, after a loss of 3.27 percent on Friday. The overall market was down 0.60 percent.

In a note to investors, an analyst at Credit Suisse warned that UBS's wealth management could come under "significant pressure" if the tax evasion investigations broadens to a case directly impacting the bank.

"In a worst case scenario, UBS could lose its banking license which could have adverse effects on the global private banking franchise," she wrote.

On Sunday, Swiss newspaper Sonntag reported that US law enforcement officials had made a formal request to come to Switzerland to investigate a tax evasion case involving UBS.

The move has been sparked by the confession of former UBS banker Bradley Birkenfeld to a Florida court last week that he conspired to help US clients dodge millions of dollars in taxes.

Swiss officials from the justice and finance ministries have already travelled to Washington for talks with their US counterparts amid concern the case could damage the overall reputation of Switzerland's financial industry.

The subprime damage and the suspected tax evasion has had severe consequences for the top leadership of the bank:

UBS AG (UBS) was at the center of a tornado of crushing news Tuesday, as it announced major changes to its board amidst pressure from the U.S. Department of Justice to reveal the names of top clients taking advantage of the bank’s tax breaks.

Four of the No. 1 Swiss bank’s board members - Stephan Haeringer, Rolf Meyer, Peter Spuhler and Lawrence Weinbach - will step down at the bank’s Oct. 2 shareholder meeting.

...

The bank has been the biggest European casualty to the U.S. subprime-mortgage crisis. It has written down more than $38 billion in the last three quarters, and its stock has dropped more than 57% year-to-date.

Continuing that trend, the bank will likely post a second-quarter loss with another markdown of about $4.9 billion, according to Bloomberg News estimates.

UBS said it will immediately submit board-member recommendations to the governance committee and will explore redefining directors’ and management’s responsibilities.

So, not only has UBS taken a severe beating in the subprime mortgage crisis, its wealth management business is undergoing severe pressures as well.

How about Citigroup's "enormous spread worldwide as a retail bank"? Well, it seems that is turning out to be a liability, rather than an asset.

Citigroup plans to sell $400 billion in assets
International Herald Tribune
By Eric Dash; Friday, May 9, 2008

Vikram Pandit is doing some serious spring cleaning at Citigroup.

Since becoming chief executive in December, Pandit has been clearing out the corporate attic of weak businesses and unloading worrisome assets at bargain-basement prices.

In an effort to streamline the sprawling company and placate restive shareholders, Pandit has sold or closed more than 45 branches in eight states. He has also disposed of Citigroup's headquarters building in Tokyo and its investment-banking base in New York and ditched more than $12.5 billion in loans used to finance corporate buyouts. And he has jettisoned the Diners Club credit card franchise, Citi's commercial leasing divisions and a big pension administration unit.

Pandit is not done yet. After months of false starts, Citigroup is now trying to sell Primerica Financial, a life insurance and mutual fund company, according to people close to the situation. He is also looking to sell its back-office outsourcing unit in India and its Smith Barney brokerage firm in Australia. Some speculate he also may try to sell 340 bank branches in Germany, possibly to Deutsche Bank.

On Friday, at Pandit's first major presentation to investors and analysts, Citigroup said that it planned to sell about $400 billion in assets in the next two to three years.

As it turns out, Vikram Pandit is trying to get rid of many of Citigroup's assets. Citigroup's worldwide sprawl made it a giant behemoth to big to manage. On top of that, Vikram Pandit has absolutely no experience running a consumer bank. Does Lee Kuan Yew really like such a person managing Citigroup's wide retail sprawl?

Suffering the Consequences

Who is taking the brunt of all this financial damage? Ultimately, it is the shareholders of these banks. And although GIC and Temasek have incorporated some sort of short term guaranteed returns for their investments in the banks, ultimately, these investments will convert into equity and suffer the effects of dilution:

Shareholders take brunt of banks' capital raising
Saturday June 21, 7:26 am ET
By Joe Bel Bruno, AP Business Writer
Banks cutting dividends, diluting shares to raise badly needed capital

NEW YORK (AP) -- America's banks and brokerages are scrambling to raise badly needed cash, but it may be at the expense of shareholders.

Since the subprime mortgage market imploded, financial companies caught in the fallout have been raising capital in two major ways -- cutting dividends and issuing more shares. Both methods erode shareholder value; analysts believe the industry is poised for more.

"The market is now seeing a substantial increase in financial companies issuing common and convertible instruments in an effort to shore up liquidity," said Standard & Poor's senior index analyst Howard Silverblatt. "The additional financing gives them immediate breathing room, with the payback being longer term dilution."

Put plainly, their gain is your pain.

Just this past week, Fifth Third Bancorp Chief Executive Kevin Kabat needed a cash infusion of $2 billion to bail out his struggling regional bank, while KeyCorp CEO Henry Meyer needed $1.5 billion. Both will issue stock to boost their balance sheets.

Banks have raised more than $60 billion this year by selling common and preferred shares.

The issuance of new stock acts to dilute the value of current shareholders because profit gets split among more shares. It's like having the family over for a turkey dinner and at the last minute grandpa invites the neighbors, too. There'll be less for everybody.

The end of the credit crisis is no where in sight, and the banks have yet to see the light at the end of the tunnel. And from how things are going right now, that light seems quite far away.

The writedowns at the banks have resulted in corresponding losses in stock price. And dilution of shareholders returns due to capital raisings only add to these woes. These are real losses that Singapore's SWFs will suffer; the supposed downside protection they built into their investments are but a short-term illusion.

Were these investments a good idea? We will only know for sure in a few years time when we have the benefit of 20/20 hindsight.

But the way things are going, the prospects for these investments simply don't look good at all.