Singapore decides not to follow Hong Kong’s buy-back approach, says The Straits Times, referring to Lehman Brothers structured products. But the Monetary Authority of Singapore’s request to the banks “to do the right thing”, as Singapore’s leading newspaper puts it, contrasts not only with the Hong Kong plan, where banks have agreed to buy back those securities. That’s the practice in America too.
Merrill Lynch, Citigroup, UBS involved in Hong Kong-style buy-backs
Singapore sovereign wealth funds, Temasek Holdings and Government of Singapore Investment Corporation (GIC), hold shares in banks that have been involved in buy-back settlements in the US. The Wall Street Journal reports:
More than a dozen banks and securities companies, including Citigroup, UBS and JP Morgan Chase have reached agreements with regulators in recent months to repurchase more than $50 billion in auction-rate securities at par,
mostly from retail and smaller investors.
UBS and Citgroup shares are held by the Government of Singapore Investment Corporation (GIC). Here's a Citigroup statement on ARS settlement with the New York Attorney General and SEC in August this year which ends with the words:
"Citi neither admits nor denies allegations of wrongdoing."
Didn’t the Singapore journalists see the third-quarter report of Merrill Lynch, released only three days ago? The “non-compensation expenses” begins with the words:
“Total non-compensation expenses were $4.8 billion for the third quarter of 2008, including the $2.5 billion Temasek payment and the $425 million ARS-related expense…”
Auction rate securities or ARS are a packaged form of traditionally stable debt, such as municipal bonds, preferred stock or student loans, whose interest rates are reset every seven to 49 days through an auction process, reports CCH Wall Street. But in February 2008, the ARS markets crashed. The banks were accused of misleading investors by claiming ARS were safe and highly liquid investments.
Bank of America, which bought Merrill Lynch, also reached a settlement this month to repurchase at par about $4.5 billion of the securities,to end probes into how the complex securities were marketed and sold, reports the Wall Street Journal.
Merill Lynch and Temasek
Merrill Lynch came close to going bust, too, at the same time as Lehman Brothers.“Lehman files for bankruptcy, Merrill is sold,” reported the New York Times on September 14. Merrill was being sold to Bank of America for about $50 million, it said.
Temasek Holdings was Merrill’s biggest shareholder at the time, holding 13 to 14 percent after making investments totalling $8.3 billion, reported AFP.
Now Merrill Lynch is worth just over $32.5 billion, having dropped almost $18 billion in value. It just posted its fifth straight quarterly loss, losing $5.2 billion in the third quarter. AP reports:
Based on Bank of America's closing price Tuesday of $23.82 and the number of shares Merrill had outstanding at the end of September, the deal is currently valued at about $32.76 billion.
How Temasek raised its Merrill Lynch stake
But Temasek Holdings raised its Merrill Lynch stake from 9.4 percent to 13-14 percent mostly with money from Merrill Lynch. Bloomberg explains how:
Temasek first paid $5 billion between December and February for about 10 percent of Merrill at $48 a share.
The Singapore company said on July 29 it will invest a further $900 million in the securities firm, after receiving a $2.5 billion so-called reset payment for losses from its earlier purchase. The sum was used to pay for $3.4 billion of Merrill stock at $22.50 a share, according to filings with the U.S. Securities and Exchange Commission.
That is the “$2.5 billion payment to Temasek” referred to in the Merrill Lynch quarterly report.
Temasek had to be compensated for its losses, same as US regulators and Hong Kong tried to ensure through buy-backs of ARS and Lehman Brothers equities respectively.
Interestingly, Temasek Holdings bought shares in Merrill Lynch when it was considered too risky by Bank of America. The New York Times reports:
Bank of America had considered purchasing Merrill some 10 months ago but found its mortgage exposure too unpredictable. Mr. (John) Thain (Merrill Lynch’s chairman and CEO) oversaw the cleansing of much of that exposure.
Now Singapore media and opinion makers talk about toxic US mortgages. But Singapore sovereign wealth funds bought shares in banks exposed to those mortgages. Temasek Holdings had every confidence in Merrill Lynch.
Merrill has a "great franchise, which has existed through many crises through a long period of time," said Michael Dee, Temasek's international senior managing director, in August, just before the Wall Street meltdown, reported the International Herald Tribune.
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