SINGAPORE — It was reported that Mdm Ho Ching, wife of Singapore’s Prime Minister Lee Hsien Loong, has broken her silence over the write-down of the US$275 investment by Temasek Holdings due to the bad investment in the now defunct cryptocurrency FTX.
Mdm Ho who is the former Chief Executive Officer of Temasek for more than 18 years, wrote, “A loss is a loss, and always painful”. She added, “A loss in what may turn out to be a badly managed company without adult supervision is egg on our face.”
“I am glad that Temasek has made a clear decision to write down this investment to zero. This helps clear the head on what to do as a next step, without being blinkered by wishful thinking.”
However, she also said that some of Temasek’s best investments were made by being “contrarian”, although she did not name examples of such investments. “
And Temasek can afford to be contrarian bcos it has its own balance sheet and can think long term,” she added. “With a long term stance, and all the pros and cons that come with that stance, Temasek is not fazed by the twiddles and sentiments of the market.”
Temasek in its statement on 17 November, noted that the sum of US$275 million that was written off was 0.09% of its net portfolio value of S$403 billion as of 31 March 2022.
Temasek Bets Wrongly On Merrill Lynch
This is not the first time Temasek thinks it “can afford to be contrarian”. Contrarian investing means investing into assets on the “cheap” that go against the grain of market sentiment, hoping for the value of the assets to recover in the long run. This is because the value of those “cheap” assets acquired may just end up as zero.
Another good example of a failed contrarian strategy employed by Temasek during Mdm Ho’s reign was its bet on Merrill Lynch during the 2007-2008 subprime crisis in the United States.
Prior to the crisis, US financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators to monitor.
US households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble ballooning in the US.
By 2008, the home mortgage debt relative to US GDP had increased to 73%, reaching US$10.5 trillion. The US household debt as a percentage of annual disposable personal income was 127% at the end of 2007. Many of these debts were securitized in a complex manner by Wall Street “gurus” and traded in the market.
From 2004 to 2007, the top five US investment banks each significantly increased their financial leverage, which increased their vulnerability at the same time. By 2007, these five institutions were over US$4.1 trillion in debt, about 30% of the US GDP.
One of these unfortunate five was Merrill Lynch. In November 2007, the troubled Merrill Lynch announced it would write down US$8.4 billion in losses associated with the subprime mortgage crisis.
In the next month December, Temasek jumped in with its “contrarian” approach to invest more than US$4 billion into Merrill Lynch thinking that it was buying on the cheap.
At the time, Manish Kejriwal, the senior managing director of investments at Temasek, said, “Our participation in this capital raising exercise is a vote of confidence for the management team, and the underlying strengths of Merrill Lynch’s franchise.” But analysts were already saying that more write downs from Merrill were to be expected.
About 7 months later in July 2008, Merrill announced US$4.9 billion fourth quarter losses for the company from defaults and bad investments in the ongoing mortgage crisis.
In the year between July 2007 and July 2008, Merrill lost US$19.2 billion or US$52 million daily. The company’s stock price tanked.
But Temasek doubled down by announcing that it would invest another close to US$1 billion into Merrill, raising its stake in the troubled company to more than 10 per cent despite the huge paper losses already incurred by Temasek.
As Temasek doubled down to buy more Merrill’s shares, Merrill disclosed that it would take a further US$5.7 billion in debt-related writedowns.
By September 2008, Temasek had increased its stake in Merrill Lynch to 13.7 per cent and became Merrill’s largest shareholder. Bloomberg reported that Merrill had lost US$51.8 billion on mortgage-backed securities in the subprime crisis, while stock broking firms downgraded its shares to “conviction sell” and warned of further losses in Merrill. And in the same month, Bank of America (BOA) also announced that it would buy Merrill Lynch in an all-stock deal.
After the acquisition of Merrill Lynch by BOA, Temasek decided to sell of its entire BOA’s stake, obtained from the stock-deal between Merrill and BOA. It sold off the BOA shares between January and March of 2009. Dow Jones Newswires estimated that Temasek had lost some $4.6 billion in its ill-fated “contrarian” venture to buy into the troubled Merrill Lynch.
Dow Jones, quoting sources who were familiar with the situation reported that Temasek sold the BOA shares for an average of US$7 a share, netting US$1.3 billion, but losing an estimated US$4.6 billion (S$6.3 billion) on the entire Merrill Lynch venture.
In other words, Temasek had invested a total of US$5.9 billion into Merrill — buying high and selling low. Ironically, Reuters reported in May 2009 that BOA shares had rallied more than 70 per cent after Temasek’s exit.
Contrarian investing is highly risky. The fact that a share has fallen is no guarantee that it is cheap, merely that it is cheaper than it was. Contrarian investing is not just ferreting around in the rubbish bins for what other investors aren’t interested in, because the assets might really turn out to be zero-value rubbish, after all, heading for the incinerators.
Perhaps the fund managers in Temasek can afford to take huge risks because, after all, they are not investing in their own money but that of the Singaporean public.