The Anti Neo-Democracy Theorist

Not quite sure what to make of this 10 billion rescue package given by GIC to UBS? Is it really worth 10 billion to obtain a 9% share in UBS, given that the GIC might not be able to get even one person on their board? Shouldn’t there be parliamentary debate at least on such a huge package? Would a debate in parliament not clarify some of the issues that people might have? For example, the relationship between the sub-prime crisis, the long term prospects of UBS and such a bailout by GIC? More clarification could be the key to understanding this bailout of the Swiss Bank. In addition, would people try to link this $100000,00000 package to the less than $300 given to low income households? That would be unfortunate considering that some of my friends in the financial sector considers this a pretty good deal and argue that not much debate is needed at all. I personally hope for more data points by the government and even UBS to “understand the extent of the goodness of the deal.” Blind faith might not be as good as informed faith. 

Wall Street Journal

Singapore to the Rescue
December 11, 2007

UBS yesterday announced the biggest loss by a European financial house from the subprime shake-out, and brought on a sovereign wealth fund to save the day. The Swiss house’s stock went up. As in Citigroup’s similar recent deal with Abu Dhabi, we don’t find a whole lot to cheer here.

The mortgage crisis makes for strange bedfellows. In the latest installment, GIC, the Government of Singapore Investment Corp., offered up 11 billion Swiss francs (€6.6 billion or $9.74 billion) to UBS. If shareholders sign off in February, GIC’s current 1.1% stake in UBS will rise to about 9%, making the fund probably its largest shareholder and possibly landing Lee Kuan Yew, Singapore’s founding prime minister, or his son, Lee Hsien Loong, the city-state’s current leader, on the bank’s board. The men are, respectively, chairman and deputy chairman of GIC. Another undisclosed Middle Eastern investor will inject an additional two billion francs.

UBS Chairman Marcel Ospel said he’s “delighted to welcome these new long-term strategic investors.” The markets seemed equally so as the bank’s shares ended up 1.4% in yesterday’s trading. But the problem for UBS and other big financial institutions is that sovereign wealth funds are no ordinary investors. State-controlled and often opaque, they are driven by different motivations than private investors. Politics may trump business interests. Who knows.

Compared with the $7.5 billion injection from the Abu Dhabi Investment Authority into Citigroup a fortnight ago, UBS chose a less controversial partner in GIC. In a post-9/11 world, Singapore doesn’t come with the same security baggage as an Arab government-controlled fund. The city-state also has solid free market and trade credentials. But GIC, whose Web site says it manages “well above US$100 billion,” isn’t transparent. We also don’t know the identity of the other “strategic” partner from the Middle East.

This “fruitful partnership,” in Mr. Ospel’s words, was forged only after the Swiss bankers had taken another hard look at their collateralized debt obligations, the complex securities backed by mortgages that have wreaked so much havoc since summer. Having already booked 4.2 billion francs in subprime losses last quarter, UBS discovered that another $10 billion had vaporized from its balance sheets. Mr. Ospel said yesterday that these losses could have been absorbed by the bank’s earnings and capital base. But it looks as if the bank’s reckless investments have forced it into partnerships with the kind of investors it would have otherwise avoided.

GIC’s direct exposure to CDOs, on the other hand, is zero, according to Executive Director Tony Tan. “We couldn’t understand them enough and we decided they could not be managed efficiently,” he said. If only the Swiss bankers had shown the kind of business judgment as their new state-controlled business partners. Perhaps, while the Swiss can teach GIC about transparency, the Asians could return the favor and teach the Swiss about risk management.

With its massive writedown, UBS is trying to draw a line in the snow. This is good news, as it could end speculation about UBS’s subprime exposure and calm markets by “creat[ing] maximum clarity on the issue,” says the UBS chief. Also positive is that the bank avoided any appeal for taxpayer relief, as in Britain’s Northern Rock debacle. The problem, in Mr. Ospel’s words, is that the bank’s ultimate subprime exposure is “unknowable.”

At least, it is a known unknowable. The same can’t be said for its new “strategic investment” partners.