Why Temasek sold its stake in BoA
I REFER to recent reports and commentaries on Temasek's divestment of its Bank of America (BoA) stake. We would like to clarify some of the points raised.
Temasek invests with the objective of delivering sustainable returns over the long term. This means our investment strategy is not aimed at delivering target returns on a year-by-year basis. This is why we report our portfolio returns not just for a single year, but for various time horizons in our annual Temasek Review.
To achieve our investment objectives, we constantly review our portfolio and rebalance it from time to time. We may choose to divest an investment, even at a loss, to optimise our risk or portfolio exposures, or if there are better opportunities elsewhere or later. We may also choose to hold or increase our existing investments.
Ultimately, the aim is to ensure that our portfolio delivers returns that are higher than the cost of capital employed on a risk-adjusted basis, or what we call Wealth-Added.
Our investment in Merrill Lynch was made in December 2007. This was exchanged into BoA shares in January this year following BoA's completion of its September 2008 offer to buy Merrill.
Our investment thesis had changed from Merrill's specific businesses to the more diversified BoA linkage to the broader US economy. The risk-return environment had also changed substantially.
We decided to divest our BoA stake after considering all relevant factors.
This move to balance risks against opportunities is part and parcel of our discipline of investing and divesting to deliver sustainable long-term returns on our entire portfolio.
We are mindful of the risks we face as we invest. We reinforce this risk-return balance through a compensation framework which puts the institution above the individual, emphasises long term over short term, and aligns employee and shareholder interests for both the upside and downside, over the medium and long term.
While we do our best to mitigate risks, the reality is that not every one of our investments will be equally successful. We recognise that only time will tell if we have made the right decisions to deliver sustainable returns on our portfolio as a whole.
Myrna Thomas (Ms)
Corporate Affairs Temasek Holdings
I referred to this report for explanations on why Temasek dumped BofA's shares. And I literally vomitted blood reading this whole load of cr4ps. It seems like this Managing Director has totally forgotten the how much risk Temasek is taking when they dumped billions into this investment bank...
Just read this article from CNN dated NOV 2007
Merrill under the microscope
Merrill Lynch, for example, predicted a $4.5 billion subprime loss for the third quarter, then jolted investors and analysts three weeks later by announcing that its real deficit was $7.9 billion - or 76% more than the initial estimate. (Oops!)
In fact, Wall Street banks are sitting on rotting piles of highly suspect, thinly traded securities no one wants to touch. "Whenever the market turns against you, you take the biggest losses in illiquid securities," says Richard Bookstaber, former head of risk management at Salomon Bros. "Because there are so few buyers, you're forced to sell at a discount that is both huge and highly unpredictable."
What really spooks investors is the fog surrounding the future. One problem is that they can't trust management's estimates of future losses. Citi, for example, says it will take additional write-downs of $8 billion to $11 billion in the fourth quarter.
But it's impossible to know whether those numbers have any relation to reality. Presumably, they are based on a theoretical model, but such models have proved highly unreliable. When Citi actually brings the securities to market, it may have to slash their prices to unload them, forcing it to take a much bigger write-down.
The banks are also far from forthcoming with detailed information on their positions, making it difficult for analysts to assess what the future holds. "The risk to investors is far greater because we're getting so little information," says Michael Mayo, an analyst at Deutsche Bank.
Backed by Treasury Secretary Henry Paulson, Bank of America, Citi, and J.P. Morgan are trying to establish a giant fund that would buy distressed debt so that investors who own it don't have to unload it at fire-sale prices. The hope is that the market will rebound before too long and that the bonds will regain much of their value. But there's no guarantee that the bonds will ever bounce back, and the bailout fund may simply delay the day of reckoning, pushing losses further into the future.
Just how big could those losses be? Both Mayo and analyst Meredith Whitney of CIBC project that write-downs could total $50 billion or more by the end of the year. Longer term, Mayo sees losses climbing to $70 to $100 billion. The wide range simply underscores the uncertainty surrounding subprime. "This will take two to three years to play out," says Mayo, explaining that it will take that long for lenders to foreclose on troubled mortgages and sell the collateral - in this case, hundreds of thousands of homes - to recoup part of their loans.