On Temasek Holdings 22 comments

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I do not often like to comment on political issues too vehemently but sometimes I feel so strongly about certain subjects in which I feel I have a reasonable overall grasp, that I have to blurt it out. Temasek is still a political organisation as of now, no matter their claims about how commercial they are (tell me how commercial you are when the former CDF can go straight from the SAF to Head of Portfolio Strategy of the organisation), and I think it will be difficult to shake off the political links. I mean, how can it possibly do so, unless it wants to deny that the money it is handling does not belong to the citizens and the state of Singapore???

So, Madam Ho Ching's resignation has signalled a recognition of the need for a change in the power structure in the organisation, and hopefully this will lead to a change for the better in all senses. My views about Temasek's execution through the financial crisis starting from 2007 are as follows:

1) Let's start from the most recent issue. I have nothing against Ho Ching. In fact, I have respect for the timing that she chose to step down, ironically because it was bad timing. People would more often than not choose to step down when things turn for the better, so that they can look good and save face. The fact that she did not do so and chose to let go to the next better player at this time says something about the lady.

2) But of course, that does not exonerate the mismoves of Temasek from late 2007 onwards when the subprime crisis first broke out. The purchase of big stakes in western financial groups started with Standard Chartered in 2006, but the real missteps were when it invested US$5.8bn in Merrill Lynch and US$2bn in Barclays as the first tremors of the global financial crisis were being felt. As of March 2008, the time of its last financial report, its portfolio was 40% loaded in financials. That stake is set to be trimmed drastically, mainly due to market movements, when its next report is due in March this year. I personally have never understood why fund managers are so captivated by financial stocks. I mean, unit trusts yes, they have to track their benchmarks so it is more understandable, but why SWFs like Temasek? Are banks the best way to play economic growth? I don't think so. Sector-for-sector, financials are the lazy man's way to play on economic growth, who claim that it offers diversification. I say that it's better to identify individual themes, say healthcare, consumer brands, infrastructure etc, and then go for the best-of-breed in each identified category, with an emphasis on not overpaying for the business. Financials should have been the one category to avoid in late 2007, given that the subprime crisis was just breaking, with possible contagion (which has become reality unfortunately). Leveraged institutions like banks would have been hard hit, not to mention the fact that they were in the eye of the storm in the first place. So why?

3) To be sure, Temasek did divest some financial institutions. It actually sold its stakes in some Chinese banks, at a good profit, in late 2007, in order to control its banking exposure. This is something that some foreign papers fail to highlight and I think we should be fair to Temasek and not just focus on its losses. Unfortunately, it turns out that it would have been best to have stuck to these Chinese banks while avoiding the Western institutions in the first place ie. we should have sat on our hands through 2007-8.

4) The most disturbing thing, in my view, is what Temasek actually sees as its role. This is what was written in a Financial Times article (link is here). (quote):"We felt, along with other [sovereign wealth] funds, that we had to do something to help stabilise the global financial system,” said a senior Temasek official, referring to the Merrill investment.(unquote). Ok, so the mission of Temasek is to save the world? Is that why its sister organisation GIC also bought heavily into Citigroup and UBS? This is disturbing because we have always seen the reserves we have built up over the years as one of our key national assets, and while these assets are substantial, they can hardly be adequate to support the national economies of developed nations with multiple times our GDP .... let alone the world. I agree with the view that SWFs should play a greater role in the world financial system, but I do not agree with the type of role ..... are SWFs supposed to provide dumb first-round recapitalising capital that have greater risk/reward profile (ie. downside risk is greater than upside potential) before the individual governments come in with the second, third rounds etc? I would've thought it works the other way.

The fact is that bigger nations with greater resources, perhaps China or Germany, can do that. These are the nations that have run a consistent trade surplus and the implicit understanding of the world system is for trade surplus countries to do more to reverse this surplus, through stimulation of domestic consumption or exporting their capital. That is to make up for their exporting their excess capacity to global demand. But in the words of our own PM, Singapore is a small sampan floating in international waters, subject to its waves and various propensities. Sure, we have one of the largest reserves in the world, but that was through painstaking accumulation. It would grieve me more if it was political pressure driving the decision-making process to buy into those Western institutions in 2007-8, more than if it was sheer foolishness or ineptitude.