17 September 2008

Occluded by the Merrill Lynch headlines, an Indonesian riddle

A brief history of Temasek Holdings' fling with Merrill Lynch, the thermonuclear end to which seized such attention that a Jakarta court ruling almost went unnoticed. Full essay.


yuen said...

there are many ways to look at temasek's investment in merryl lynch; in $ terms, bank of america is taking over ML at a somewhat higher price than temasek paid; the takeover changes temasek from being the largest ML shareholder (14%) to still substantial bank of america shareholder (I think about 3-4%); assuming temasek was only seeking financial returns, not strategic control, it has (so far) done OK

however, legendary american investors like warren buffett, carl icahn, george soros etc have not come to the rescue of merryl lynch, AIG and lehman brothers, meaning that they did not find the investment opportunities attractive; if they had been interested, it is unlikely that the companies would have sought buyers from middle east and east asia; the asian buyers like the prestige, whereas the US tycoons dont find it important

A Tan said...

Not so mysterious. Arabs are street smart. And they employ FT to advise them, but they still in charge of decision-making.

Our top people do not seem to be strret smart in commerce and investments.


Dubai bought ports, HSBC stakes. Singapore bought Barclays, ML, UBS and Citi. And stake in BAA

Kuwaiti Investment Authority still negotiating with ML on compensation over initial investment. Did not reinvest, what ML wanted.

Qatar pulled out of big private equity deal last yr, at the last minute. Annoyed mkt no end. But right thing to do.

Arabs do not have whopper like Shin.

Arabs not perfect, got mistakes like Citi but track record better than Temasek, GIC.
Funny thing is that S'pore thinks Arabs need our expertise.

Alan Wong said...

Now that his good-for-nothing daughter-in-law is causing such massive losses to our Singapore taxpayers' funds, I just wonder whether our LKY still wnat to insist that it has been a wise investment.

Anonymous said...


I am surprised you choose not to publish my earlier comments on the riddle.

Your readers could not be so naive to think that corruption in the system does not shed any light on this issue.

You would get the same answer from people who are familiar and understand the situation in Indonesia.

See yesterday's report on this week's arrest of a commissioner of the KPPU for accepting a bride from a media businessman.
(Indonesian business regulator arrested: corruption watchdog)


Yawning Bread Sampler said...

Anonymous, 18 Sept, 18:15

There wasn't any comment concerning corruption in the moderation queue. Perhaps it got lost in cyberspace.

yuen said...

How did the US finance industry mess up so badly? They are supposed to be so smart and experienced, and inventive too, with many PhDs and MBAs, and used to teach the rest of the world how to operate. There was even a time when the Singapore government was encouraging people to put their money into unit trusts and other modern financial products, and new courses in financial engineering were started in NUS to copy the Americans. To have them crash like this is not just embarrassing to them; it is embarrassing to all the people in the world who wanted to humbly copy them.

You must have heard many explanations and inside stories about what happened, and they (like all those brilliant financial advisors) only left you more confused than ever. Now let me try to explain it, starting from the beginning.

Let's suppose I and my friend X have a company with $1M of assets each, and the two companies exchange $1M of shares, after which each company has $2M of assets, doubling our wealth, without actually producing anything in addition.

We then each issue $2M of bonds, guaranteed by the assets of the company. After selling the bonds, each company has

$1M of the original assets
$1M of shares of another company
$2M of cash

In case buyers have doubts about my bonds, I get my friend to guarantee them, while I guarantee his bonds; so the papers look really secure - guaranteed by the issuer's assets (now $4M) AND by another company with $4M of assets, half of the 8M combined assets being cash - surely these look like trustworthy guarantees? So the rating agencies rank my and his bonds AAA...

As you can see, starting from the original $2M of assets of the two companies, we have created something four times the size, 75% being just air in a bubble. Now consider the possibility that the original $2M of assets may themselves be air in a bubble to begin with...

Was there anything illegal? no; dishonest? depends on what honesty is...

Now imagine while I did profitable things with my cash and increased my cash and assets, but my friend went and spent his $2M on drugs, women, gambling, etc, and could not keep up interest payment on his bonds. He declares bankrupcy, and the bond holders ask me to make good on my guarantee, so I lost $2M of cash, while his company's shares became worth 0 - my company is down to the original $1M of assets, but owing the bond holders $2M; at the same time, his guarantee of my bonds also becomes useless, and rating agencies cut my rank from AAA to junk, so that any future bonds I issue have to be at much higher interest. I could not raise any new money by issuing shares or bonds, so I too go bankrupt.

This is what happened in USA, on a scale a million times bigger.

Anonymous said...

Another bloated US "asset", the greenback. At the rate they are printing it, I won't be surprised if it's worth less than the paper it's printed on, years down the road.