What is one to make of Temasek's decision to sell its entire stake in Bank of America (BoA)?
The move has resulted in one of the largest-ever realised losses from a single investment in Singapore's history. The number is so large - at least US$2.3 billion (S$3.4 billion) - that one has to wonder exactly what it was that compelled Temasek to bite the bullet.
After all, outgoing CEO Ho Ching reiterated this week that the investment fund takes a long-term view, at least 10 years and up to 50 years. So it could have well waited a few years for the global economy to recover and cash out then.
Instead, it will now face the wrath of the Singapore public, already shaken by news that Temasek's portfolio shrank 31 per cent in the wake of the financial crisis and its recent $401.5 million investment in Australia's ABC Learning Centres has likely lost most of its value.
There are probably three reasons why Temasek chose to cash out.
The first has to do with the fact that, unlike the Government of Singapore Investment Corporation (GIC), which invested in UBS and Citigroup, Temasek did not end up with what it paid for.
Temasek's original US$5.1 billion investment was in Merrill Lynch, a truly global business engaged in high-yielding activities like corporate finance and private banking. BoA, on the other hand, is focused on more traditional businesses like consumer and corporate lending.
More importantly, Temasek owned as much as 13.7 per cent of Merrill. But after BoA's takeover, it owned only about 3 per cent of the merged entity. In other words, Temasek went from owning a major stake in a global investment bank to a minor stake in a gigantic US lender.
If BoA did not fit into Temasek's strategy, it was entitled to exit the investment. If Merrill had been bought by a similar type of institution, say JP Morgan or Goldman Sachs, Temasek would not have been in such a dilemma today.
Secondly, there were very real fears a few months ago that major US banks could be nationalised.
If a bank like BoA was nationalised, the value of its shares would likely plunge to zero or near-zero. That risk was enough to prompt many other shareholders to rush to exit their investments early this year, however painful the loss.
Finally, BoA is showing some signs of distress. A recent US government stress test showed that 10 US banks needed US$74.6 billion more in capital, with BoA making up almost half that amount at US$33.9 billion.
Leadership problems have also emerged. Once hailed as a hero, chief executive Kenneth Lewis was recently ousted as BoA chairman. His position as CEO is now in doubt, and the US government has urged BoA to revamp its board.
So if one is inclined to take a charitable view, Temasek's action is similar to that of an investor cutting his losses and trying to recoup his money by betting on winners somewhere else. But such arguments are unlikely to assuage Temasek's critics.
There is just no running away from the fact that the investment fund has lost as much as US$4.6 billion of the nation's reserves (the topmost end of the loss range) from a single investment in just over a year.
Here, Temasek will need to clear the air on two major issues. The first is the timing of the sale.
Temasek unloaded all its shares by the end of the first quarter of this year when prices averaged US$6.73, just before an April rally that saw BoA shares double from US$7 to US$14. It is impossible to time the market perfectly, of course, but could Temasek have waited a little while more for the situation to improve?
Just three days ago, US Treasury Secretary Timothy Geithner was quoted as saying that the US financial system has completed a big part of a painful adjustment away from its excessively leveraged state, and was 'starting to heal'.
Tellingly, none of the other sovereign wealth funds that had ploughed into the global investment banks at roughly the same time had exited their investments.
The Singapore Government has already admitted to buying into these mega-banks too early. Did Temasek make it two wrongs by also selling too early? Could it have hedged its bets by selling only part of its stake?
The second issue is whether Temasek had taken sufficient measures to protect itself against downside risk, knowing full well that it was investing such a hefty amount in a US bank in the middle of a gathering financial storm.
The comparison with GIC is illustrative. GIC invested US$6.88 billion in Citigroup just one month after Temasek's investment in Merrill Lynch. But GIC's investment came with a protection clause: It could opt not to convert its investment into shares should the stock price dip, and instead receive 7 per cent in coupon interest in perpetuity.
That clause came in handy when it was asked by the US government to convert its investment into shares three months ago. To give up its right to that coupon interest income, Citigroup was forced to offer GIC and other similar investors a fairly low conversion price of US$3.25 a share - so low that other Citigroup shareholders complained.
As a result, GIC is not in Temasek's position. It is, in fact, sitting on a small paper gain today, going by Citigroup's closing price of US$3.55 yesterday.
To be fair, neither Temasek nor GIC - or any shrewd investor - could have predicted the ferocious market meltdown that occurred in September last year. These are, after all, extraordinary times, and so extraordinary outcomes - and losses - will be expected.
Still, Temasek should not shrug off the loss as yet another wiggle in the curve it had no control over. It must not stop doing what it does best, which is to continue to be aggressive and obtain the best possible returns for the people of Singapore.
But some serious soul-searching is in order at the 35-year-old institution so it can emerge stronger and better-equipped for the job ahead.
