The recent decisions by the Singapore government to bailout Citibank deserve some hard questions and answers, be in from a parliamentary mode or in a general press conference. Will our journalists in Singapore ask the hard questions?
The bigger question here is can the government investment corps and Temasek Holdings come out to justify the deal? How much preparation went into the purchase of these entities?
Some questions worth asking:
1) With most of these banks undergoing restructuring (more than tens of thousands of jobs lost, reduced dividends and huge amount of asset/money write-downs and lost) at during the sub-prime crisis, how do know how these banks will perform in a more general recession? How long will the US government wait before adopting a stimulus package to boost the economy? What is the real effect of a potential Bush package? In the absence of a stimulus package, how will the economy perform? How will the election of either a republican or a democratic candidate affect the general economy? In turn, how will it affect the performance of the banks? Why are so many analysts so positive about the long-term aspects of the Citigroup? Will the US government bailout their own banks (unlikely) like the way the United Kingdom government is considering nationalizing Northern Rock?
2) Market watch has argued that Singapore might have paid 2 billion more than their Chinese counterparts in getting the Citibank deal. Other reports have reported that the deal was done within a relatively short period of time, with some analysts calling the purchase “opportunistic.” What was the real nature of the negotiation between Citigroup and GIC? Was it bought in haste? Was it hasty or a result of a smart and careful decision making at the “business” moment?
3) What are the benefits of such a major purchase for the general populace? Do any of these deals have to benefit Singapore? What is the role of parliament in scrutinizing these deals? And the big elephant in the room, what are the contingency plans if these investments falter?
4) Why are the parliamentary opposition, nominated members of parliament and the established civil society quiet on the issue? Is it because of the lack of expertise? Do you have to be an expert on the issue to ask basic questions?
5) Do “convertible preferred securities” possess a lower risk? Why was this option not used for ML or UBS? Or was this option considered? Was this option not available at all?
6) A Reuters article on Jan 16, 2008 quotes a GIC official saying that “The approach taken with the specific transactions involving UBS and Citigroup differs from our norm as GIC sees the current financial situation in the U.S. and Europe as being unique and unprecedented,” GIC spokeswoman Jennifer Lewis told Reuters.
“Notwithstanding their large size, the two transactions have been structured with appropriate downside protection, and are within the GIC’s risk management parameters,” she added. What exactly are these risk parameters? How long are these parameters gauged for? Will there be any possibilities of some elaboration?
6) There is an assumption in press reports that GIC and Temasek Holdings, by not having a seat on the board, would be a good thing. This is because it will reassure the industry that the government would not be involved in the decision making of the banks (reinforcing idea of independence). How about looking the issue from another angle? What about the trade-off between independence and having a say to stop irrational decisions? Would it be better for GIC to have a say in decision making after spending so money? Would it be better for GIC to express their opinions in major decisions of the company through the boards (such as the hiring of a new CEO or major decisions in Citigroup?) rather than external measures if they really wanted to do so in the future?
15 responses so far ↓
Aaron Ng // January 17, 2008 at 1:22 am
I think at the end of the day, we have make a choice. A choice between greater accountability or greater returns on our reserves. The two are not necessarily compatible all the time because the process of greater scrutiny can jeopardise the opportunity of landing a good deal.
It is still anyone’s guess whether these are good deals in the short term but in the long term, they are unlikely to be bad deals, unless the institutions that the government has been buying in collapses. With any investment, there’s always the risk of losing your entire investment, no matter how well you do your research.
I guess for me personally, the issue is not really the few investments over the past few weeks but rather, the overall portfolio. I don’t know what is the profile of GIC’s investment. If UBS and Citigroup’s purchase further diversifies the portfolio, I should think that the purchases are alright. If it doesn’t, then there’s cause for worry.
John // January 17, 2008 at 2:08 am
I noticed that government seen quick to invest in those current exorbitant money-losing deals like Swiss bank UBS, Citigroup, Merrill Lynch, all of which are experiencing financial crisis now.
You are right to ask why they are so overly-positive of recouping the investment in the future ? Do they have some prior obligation to meet with these investment companies and that they have some large stake in that the public is unaware of ? Why quick to act ?
LKY is the advisor to Citigroup, and will there be conflict of interest ?
http://www.citigroup.com/citigroup/press/2006/060905c.htm
How much is the citigroup paying him for his service ?
Is there any other ministers or Singapore senior officials holding post or as chairman in these invested companies that fund are injected to save the companies ?
It’s time for some accountability and transparency, and no more nonsense about “We are lucky to have such a government”
Read the following news:
http://www.nytimes.com/2008/01/16/business/16bank.html?ex=1358139600&en=0660ff653133c669&ei=5088&partner=rssnyt&emc=rss
John // January 17, 2008 at 2:21 am
Aaron Ng,
“With any investment, there’s always the risk of losing your entire investment, no matter how well you do your research.”
True. Why not pegged the ministers’ salary across the board in these investment then so that ministers themselves will be accountable to the loss of sovereign wealth ? History of local government investment in foreign companies have shown that they are nonchalance about the loss but rather unaffected and even downplayed it since they still be paid lavishly. The public suffered through ERP, price hike, unable to retire kind of nonsense to offset these loss. So why only the public need to bear the burden of these blunders if they have no say in it ?
Don’t be surprised another hefty round of price hike will occur after CNY, and all gantries will be full force again, some which clock 24hrs.
Why ? Lately, I see all the ministers appearing in TV media to explain the price hike and asking people to be prepare for their own good. This implies a never-seen before price hike after 2007. Count me wrong but this has always Uniquely Singapore.
Eddie Loh // January 17, 2008 at 3:17 am
Can’t wait for the next election to throw the current government out of the window if and only if I have a chance to vote.
Daily SG: 17 Jan 08 « The Singapore Daily // January 17, 2008 at 3:54 am
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BLUE SINGAPOREAN // January 17, 2008 at 9:09 am
My brother got retrenched yesterday at Citibank, one of the first to go. He said better go now than later, no regrets, infact happy about it, more to come at all levels.
Onlooker // January 17, 2008 at 1:25 pm
Great, The nest Eggs are now in a foreign bank that will suffer the Fallout of Subprime loan. A Crisis that was caused by the King of America.Well I would agree with John on one thing though the Salary will have to be pegged to the investments.They should have buy Gold instead.
car.bang4 // January 18, 2008 at 12:46 am
I think that all the questions about GIC and Temaseks’ investments are quite irrelevant. Their investment strategy is very long term and by that I mean 50 to 100 years. In the long run, companies like Citigroup, Merrill and UBS will still be around and chances are that those investments will have paid off way before then. I think the question that all of us should be asking is how and when if ever, will any average Singaporean actually benefit from any investment returns that GIC and Temasek make. As it stands, both these invesment vehicles have earnings in the billions of dollars each year. How and when has any average Singaporean ever benefitted from any of those returns. Let’s not talk about Economic Restructuring shares and little handouts like that because they do not come directly from the earnings of these two super investment entities. The only beneficiaries of the existence of GIC and Temasek so far has been the few elite Singaporeans and good number of foreigners employed by them. By this I mean the employees of these entities reap the benefits with their high salaries and bonuses. This is indeed a fact and a sad one at that. It is truly amazing that a foreigner would stand to gain more from the very institutions that were set up to provide for Singapore citizens. We pay them salaries and bonuses in the hundreds of thousands of dollars and yet baulk at giving more than $290 a month to our old and needy.
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John // January 18, 2008 at 4:18 am
ar.bang4 ,
“Their investment strategy is very long term and by that I mean 50 to 100 years. ”
Let’s face it. In this turbulent and fragile period, five years are considered long term enough. I will have laugh if between the every 7 years nothing devastated happened to the economic. If history is any indication, within every next few years, bad economic will result and this is just cycle eg financial crisis, man-made disaster eg 911. In other words, within those period, before the GIC recouped the investment, they will even pump more money to help save their invested companies. By then, do you think within the next fifty years, we can recover the loss when we will have pumped and lost 100billions US to help save the queen. Moreover, the money value of today cash is even higher than tomorrow.
The answer is why should we bet on future return if we can’t even live to use it ? Let’s not push everything to the future. Enjoy the fruit of labour while alive.
The answer is talking about investing for the long term is bull if it take more than 7 years. As long as it did not recoup the investment within this period, it means that is something more than mean the eyes when government invest in those desperate companies now.
By the way, did the government define the meaning of long term ?
Wayne // January 18, 2008 at 4:31 am
“Their investment strategy is very long term and by that I mean 50 to 100 years. ”
Let’s see. The modern banking system in america is only roughly 2 centuries and the decision to enter Asia only occurred in 1902, for citibank. In the meantime, most American and European investors worked through Chinese banks in Southeast Asia, with others working with those in Taiwan and Japan. During the 1930s, a large majority of banks set up by overseas Chinese failed and went bankrupt. Many others faced severe troubles when supposedly savvy businessmen like Tan Kah Kee faced huge problems.
In America, as the economic depression deepened in the early 30s, and as farmers had less and less money to spend in town, banks began to fail at alarming rates. During the 20s, there was an average of 70 banks failing each year nationally. After the crash during the first 10 months of 1930, 744 banks failed – 10 times as many. In all, 9,000 banks failed during the decade of the 30s. By 1933, depositors saw $140 billion disappear through bank failures.
In the United Kingdom, the closure of the Bank of Credit and Commerce International has lost about 20 local councils up to £30m in investments. n the end 35 councils lost nearly £90m. Western Isles Council suffered the greatest loss of £23m which led to the resignation of the council leader, Donald Macauley.
Councils blamed the government and Bank of England for continuing to recommend BCCI, as evidence of its fraudulent activities mounted. A public inquiry was launched.
The Commons Treasury and Civil Service committee’s investigation heard evidence from all sides and criticised councils for being careless with their funds.
In March 2001 BCCI liquidators, Deloitte and Touche, were finally granted the right to sue the Bank of England over its failure to properly regulate BCCI.
The lawsuit began in January 2004 and was the first the Bank had faced in its 300-year history.
Deloitte dropped the case in November 2005 after a reserve judgement from the High Court said the case was no longer in the best interest of creditors.
On Jan 26, 2002, New York Times reported:
While J. P. Morgan Chase rushed to detail its potential losses, Citigroup has repeatedly rebuffed inquiries.
But the paths taken by the two investment banks should start to converge over the next two days as they report their earnings for the fourth quarter of 2001. J. P. Morgan is expected to provide new details on the cost of its exposure to Enron today, while Citigroup is expected to end its silence about just how deep its financial ties to Enron went when it discusses its earnings tomorrow.
Conclusion:
I am not quite sure why so many people have blind faith in banks - are people so presentist today that they have no concept of time?
Charles // January 18, 2008 at 5:08 am
I agree with wayne. One cannot have blind trust on financial institutions.
The current subprime housing crisis in the US is mainly a result of ‘deregulation’ in the financial markets which allows these institutions to come up with ‘unit funds’ that are not backed up by any equal collaterals.
The US currency and its economy is spiraling downwards, which I had predicted and told my friends as early as mid last year (and still strongly believe) that it is going to happen soon.
Even institutions such as the IMF has expressed similar bleak sentiments (of the US economy experiencing a slowdown) and that the emerging Asian powerhouses such as China, do not have the ‘consumer power’ to balance the slow growth in the US.
Bailing Citibank and Merill Lynch will prove to be one of the most disastrous decision that have ever been made by the investment arm.
It’s like saving a sinking ship - thats why even China, Saudi Arabia and Singapore are desperately trying to save these institutions because we cannot afford a US financial meltdown…
dominique // January 19, 2008 at 9:27 am
Actually there is one issue worth gettting an answer. Where are these humongous money GIC & Temask coming from? I am not asking if these money came from the people of Singapore but really where are these money being parked at just before they intend to transfer n invest in Citi, Merill etc?
Following that, are these existing portfolio’s returns much better than returns from investing in Citi n Merill?
Eaststop // January 20, 2008 at 8:03 am
hi,
in my view, there is no better time for the sovereign wealth funds to buy into a stake of some of the biggest financial stocks in the world.
The huge amount of foreign reserves amassed by the likes of China, Middle East and Singapore is viewed enviously and suspiciously by the Americans and the Europeans. The backlash against the purchase of their national assets (read the failed acquisition of P&O by Middle Eastern investors) have reached feverish pitch in 2006.
There is no better time to come to these banks’ rescue as a white knight rather than as an asset raider.
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