THE purchase of Merrill Lynch by Bank of America in a US$50 billion (S$72 billion) deal highlights the risk Temasek Holdings and other sovereign funds took in betting on a financial sector whose troubles are far from over.

Temasek, Singapore's stateowned investment firm, has ploughed over US$5 billion into Merrill, but the value of the investment fell when the United States bank suffered massive losses from risky housing debt.

That was before Merrill agreed to halve Temasek's purchase price in July.

With an average price of between US$23 and US$24 paid per Merrill share, Temasek could make a small paper gain, given that Bank of America is paying US$29 a share in an all-stock deal for the third-biggest global investment bank.

Temasek will end up owning shares in Bank of America, a bank with a much bigger franchise but with the challenge of integrating and dealing with Merrill's bad debts.

Analysts said it was unclear if Temasek would sell or hold for the long term.

"If you are a long-term investor and have a five- to 10-year horizon, then whether you make a profit or a loss on Bank of America's share price shouldn't be an issue for you now," an analyst, familiar with the workings of the fund, told Reuters.

A Temasek spokesman declined to comment on the sovereign fund's next move.

A second source with knowledge of the fund said Temasek is waiting for more clarity from Merrill chief executive John Thain.

Temasek has been expanding outside its Asian base and holds stakes in Barclays and Standard Chartered.

In Dubai, state-owned investment agency Mubadala said it was not looking to bail out any financial firms in difficulty.

"There is a good amount of volatility and it is not the best time to invest," CEO Waleed al-Muhairi told Reuters. "Right now, we, like some others, will wait and see."

Mubadala had a 7.5 per cent stake in US private equity firm Carlyle Group as of February.