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Life
gets tough for Asia’s Sovereign Wealth Funds
Philip
Bowring
Asia Sentinel
17 Mar 08
http://asiasentinel.com/index.php?option=com_content&task...
Helping
out the Western bankers wasn’t such a good idea
In
the space of three days last week the US Federal Reserve had to
throw an additional US$200 billion at a tottering US financial
system and organize the rescue of the Bear Stearns investment
bank. It is a humiliation bigger even than the Bank of England
suffered with the bail-out of Northern Rock – and with far
bigger international implications.
But there will be
plenty of embarrassment in Asia too, particularly for officials
from the sovereign wealth funds of China, Singapore and the Gulf
who had been such enthusiastic investors in western financial
institutions, both before the crisis broke and when riding
prematurely to the rescue of balance sheets ravaged by massive
loan write-offs.
Asia Sentinel warned three months ago
that the sovereign wealth funds had become too easy a touch for
US financial giants. Their investments in the likes of Citibank,
Morgan Stanley, UBS, Merrill Lynch and Blackstone, intended to
gain seats in the sancta sanctorum of western finance, would
probably come back to haunt them. And so it transpires as prices
of the whole financial sector continue to plummet.
Financial
crises are always worse than their players and the responsible
central banks like to believe. Whether from refusal to face
facts, or deliberate distortion of the facts, new investors get
sucked in long before the losses have peaked or the full damage
is known. Asian investors should have known better, remembering
the sequence of events in the Thai banking sector in 1997-99, or
in Japan in the early 1990s.
Over the past three months
the prices of all these companies have fallen steeply and may yet
have much further to fall. For big names such as Merrill Lynch,
Citi, Blackstone and UBS the fall has been between 30% and 45% in
this period alone. Every major financial crisis claims at least
one major institution and lots of lesser ones. Those that survive
will have to draw in their horns. Some may be on official
life-support for months if not years.
The foreign funds
were flattered that the US (and even the Swiss) needed them and
thought that helping the west would soften burgeoning opposition
to sovereign wealth funds. But decisions made on the basis of
politics or emotion seldom make the best commercial sense.
Perhaps they have learned their lesson and can leave rescuing US
financial institutions to those who created the mess –
primarily the Federal Reserve through neglect – and instead
buy some real US assets, companies in information technology,
engineering and retailing that have global markets and
unsurpassed know-how.
But embarrassment over the
premature bailout efforts may not be the only reason for Asian
wealth funds to be feeling miserable. The unanswered question now
is how big their losses will be from investing in the myriad
opaque structured-investment vehicles, debt funds and leveraged
buyout funds. It could well be huge. Last month, the Standard
Chartered-sponsored Whistlejacket went down with losses so severe
that the bank refused (unlike HSBC and Citi) to bring the fund
onto its own books and take a direct hit. Stanchart weaseled out.
This month it was the turn of Carlyle Capital, a highly
leveraged mortgage debt fund run by the secretive, private
Carlyle Group. That Carlyle, with its huge array of political
connections, and with Abu Dhabi owning 7.5 percent, could not
arrange the fund’s rescue said a lot about how (with good
reason) few in the financial sector trust each other any more.
They would rather wait for another fly-past by “Helicopter
Ben” Bernanke, the chairman of the US Federal Reserve, to
deliver more cheap Treasury credit in return for dodgy
mortgage-backed paper.
It is inevitable that much of the
investment, both debt and equity, in vehicles like Carlyle
Capital and Whistlejacket came from big name Asian investors –
they were the ones with cash to be burn – and, it turns
out, be burned. More will be hit by the demise of other Special
Purpose Vehicles that invested in high-sounding but low-grade
paper. Hedge funds are disappearing by the day, some such as
Drake in the US and Peloton in the UK getting publicity, other
disappearing silently, either being liquidated or halting
withdrawals.
Of Asian investing funds, Temasek is a
particularly interesting case. Under Chief Executive Ho Ching,
the wife of Prime Minister Lee Hsien Loong, it had become quite
adventurous under the influence of bullish Masters of the
Universe from Wall Street and Zurich (UBS was always a favorite
in Singapore). In the face of abundant global liquidity, Temasek
was in no hurry last year to rein in the growth of its balance
sheet, using cash to chase not only costly banking acquisitions
but betting heavily on investments in private equity and buyout
firms. In 2006, according to its annual report, it set up a
special purpose vehicle named Astrea to hold investments in no
less than 45 private equity and buyout funds. Astrea then raised
US$810 million in securitized debt. The names and balance sheets
of those funds would make interesting reading.
Temasek is
at least partially transparent. Most of the other big Asian funds
are not. So we may never know who lost what. But given the size
of Asian dollar holdings and the sway that the US investment
banks that distributed the paper have throughout the region (with
the partial exception of Japan), the losses from the US financial
debacle could eventually total $1 trillion (as now seems very
possible). Asia’s share is likely to be at least 25
percent.
On top of that they will have to bear the brunt
of the decline of the dollar boosted by Bernanke’s decision
to attempt to cure the disease brought on by excess credit by
further cheapening the currency. Asian creditors must now live
with the likelihood that the legacy of former Fed Chairman Alan
Greenspan and Bernanke will do even more lasting damage to the
power and reputation of the US than George W Bush’s Iraq
war.
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