The sub-prime crisis has brought mighty financial giants to their knees, caused their share prices to plunge and mired their shareholders in mountains of paper losses.
And the pain has been felt by all across the world - from the elderly Swiss pensioner clutching his lot of UBS shares to savvy British investor Joseph Lewis, whose US$1.1 billion (S$1.5 billion) stake in Bear Sterns vanished overnight.
Sovereign wealth funds from the Middle East, China and Singapore - which have poured in billions to prop up embattled behemoths like Citi - have not been spared either.
And as share prices on Wall Street enter a free fall, it's hard not to ask what has happened to the mega investments that the Government of Singapore Investment Corporation (GIC) and Temasek Holdings made in companies like Citi, UBS and Merrill Lynch. The answer?
Temasek is currently sitting on total paper losses of more than S$1.3 billion from its stakes in US investment bank Merrill Lynch and British bank Barclays.
Merrill shares have fallen about 16 per cent since Temasek invested US$4.4 billion in the firm at Christmas last year. The price it paid at the time, US$48 per share, was a 11 per cent discount to the US$53.90 that Merrill traded at earlier.
In late February, Temasek invested another US$600 million to exercise an option to buy a further stake in Merrill at the same price. The share price has fallen since and was hovering at US$44.90 earlier last week.
Meanwhile, Barclays' stock price is down about 36 per cent since July, when Temasek pumped £975 million (S$2.6 billion) into the bank to help boost its bid for ABN Amro. Back-of-the-envelope calculations show that this is a paper loss of £357.5 million.
For GIC, which invested 11 billion Swiss francs (S$14.5 billion) in Swiss private banking giant UBS and US$6.88 billion in Citi at the end of last year, falling share prices are less relevant.
This is because GIC had structured its investments to protect itself against share price falls.
In the case of Citi, GIC invested in what is known as 'convertible preferred securities' - giving it 7 per cent yearly return whatever the share price.
Similarly, its UBS investment is in the form of convertible notes which pay an annual return of 9 per cent.
Under the terms of the deal, GIC can convert these securities into shares and sell them off in the market for a profit.
But unlike the Citi perpetual notes which GIC can hold for as long as it chooses, the UBS notes must be converted into stock within two years of the date of the issue.
Citi shares are down about 8 per cent over the past four months, and UBS has dropped about 38 per cent since December last year.
THREE POINTS
With the benefit of hindsight, the timing of these investments seems less opportune, even premature.
So market watchers question if GIC and Temasek should have waited a few months to buy at a lower price. In fact, some are wondering whether they should have bought anything at all.
The jury is still out on these issues, but three points are relevant to the discussion.
The first is that GIC and Temasek picked up these stakes in extremely unusual circumstances unlikely to be repeated any time soon.
Citi and Merrill are among the most recognised and storied names in Wall Street. UBS is one of the world's largest wealth managers and Barclays is the United Kingdom's third-largest bank.
It was rare for them to have to raise as much funds as they did and some would argue that GIC and Temasek were lucky to have been approached directly and given first dips at the opportunity.
Mr Ng Kok Song, GIC's group chief investment officer, said at the time the deal was announced that GIC saw the 'financial situation in the US and Europe as being unique and unprecedented'.
'A confluence of factors - like the sub-prime crisis, the credit squeeze and a possibility of recession - has led some banks with strong franchises to require urgent capital infusions,' he had added.
There are even spin-off benefits. Senior bankers such as Mr Rolf Gerber have suggested that Singapore may be viewed even more favourably as a regional financial hub for the operations of these banks now that Temasek and GIC are significant shareholders.
Secondly, seasoned investors like Mr Warren Buffett have said that great investments are not based simply on timing, but on time. And deep-pocketed, long-
term investors like GIC are able to wait patiently for the banks to recover the lost ground in their share prices by restructuring and rebuilding their businesses over several years.
To be sure, that could be a long wait. The sub-prime crisis has forced the banks to confront deep-seated problems and few, even now, would dare to hazard a guess on how many months - or years - it may take for them to recover their heady 2007 share price levels.
Still, GIC and Temasek can hold investments for many years, so they can ride out the short-term problems, said Ms Pauline Lee, a banking analyst with Kim Eng Securities.
Finally, even though their share prices are down, these banks are on the mend. Or at least they seem to be.
Drastic moves taken by Citi, Merrill and UBS - from hiving off businesses to axing thousands of employees - show they are serious about rooting out their structural and management weaknesses.
UBS has launched a thorough review of the problems that led to its massive blunders and is in the midst of slimming down its investment bank.
Citi is undergoing a restructuring that will help it to be closer to customers by carving its business outside the US into four regions, which will headed by regional CEOs - Asia-Pacific; Central and Eastern Europe; Western Europe, Middle East and Africa; and Mexico and Latin America.
Merrill's turnaround appears to rest on the able shoulders of the newly appointed chief executive, Mr John Thain, who has won investors over with his decisive moves to stabilise the bank and cut costs.
Its share price has improved in recent days, as the bank announced an optimistic outlook to return to profitability in the second half of this year.
Finally, Barclays, which has suffered from less write-downs than some of its European rivals, has lowered its target for annual compound growth of economic profit to the 5 per cent to 10 per cent range by 2011. But it still appears on track to achieve this by diversifying its business, especially in Asia, say analysts.
ROCKY RECOVERY
However, with so much uncertainty about how deep and long the US recession is, the road to recovery for the banks will be a rocky one.
The estimated cost of the global financial crisis has ranged from US$350 million to the International Monetary Fund's staggering US$1 trillion. But this does not factor in the damages to the real economy, which has seen deteriorating business conditions for companies worldwide as confidence plummets.
Economists such as analysts at the Organisation for Economic Cooperation and Development have predicted that the financial system and economy is only likely to recover fully in early 2010. Others believe financial stocks may remain depressed and volatile even longer.
The banks will also face challenges of rebuilding staff morale and revamping their risk systems to systematically red-flag problems in their portfolios, before they can glean real results from restructuring their business.
The damage to their reputation will also take a longer time to repair. UBS has estimated that it may take two to three years.
Will history prove that GIC and Temasek made the right decisions investing a combined S$33 billion in these banks?
Only time will tell.
This article was first published in The Straits Times on April 27, 2008
