MERRILL LYNCH: Wall Street Credibility and Sovereign Wealth Fund Capital

You really can fool all of the people all of the time (or so it would seem); Writedown after write down, Lies and more lies: and yet Wall Street believes in the Investment Banks!!! The DJIA was up over 266 points yesterday!
"Fool me once, shame on you. Fool me TEN TIMES!!, shame on me."
Investors just don't seem to get it yet.

On Thursday 17th July, 2008 Merrill Lynch lost $4.9 billion for the June quarter.
John Thain (Merrill's CEO) reiterated his stand that Merrill did not need to raise more capital. (By selling equity). http://www.iht.com/articles/2008/07/18/business/18merrill.php

12 DAYS later, a stock sale is announced !!!! Yes they need more capital AGAIN!!!
Meanwhile, Mr. Thain is also looking to sell stakes in Merrill’s valuable assets (Bloomberg LP and BlackRock Inc) to raise capital.

The Bullish Bear says-----------------

Merrill sold some $30.6 Bn worth of TOXIC CDO’s at 22 cents on the dollar.

• Firstly, after Merrill Lynch, who’s going to be next? http://www.forbes.com/wallstreet/2008/07/29/merrill-citi-banks-biz-wall-cx_lm_0729writedowns.html
• Did the CDO’s turn toxic overnight or in the last 12 days since the June quarterly result.
  $ 30.6 Bn -> $ 11 Bn at the end of June -> $6.7Bn yesterday.
• Was the sale triggered by the Undercapitalized Bond/ CDO Insurers who could not pay up?
• Was the sale cheaper than marking them to market (since the really toxic stuff may have no market) which may have triggered more confusion and asset fire sales?
• What is the market value of the ‘Toxic Securities’ of Bear Stearns that the FED now holds; not 22 cents on the dollar I hope??
  

Wall Street Credibility and Downside protection for Sovereign Wealth Funds
Yesterday, a further $ 8.55 Bn stock sale was announced, including a stock sale to TEMASEK (Investment Company of the Government of Singapore).

Thanks to a downside protection clause, Temasek will be compensated for the nearly 50% loss suffered on their December 2007 ‘bailout investment’ in Merrill Lynch.

As per the clause, if Merrill raised more capital in the 12 months following the Temasek deal, at a stock price of less than $48, Temasek would be compensated for the difference.

The Wall Street Journal calls it a Sweet Deal for Temasek. http://online.wsj.com/article/SB121735266454993851.html?mod=googlenews_wsj

I would call it STREET SMART investing!!
When you must deal with someone whom you cannot trust completely, like bankers that just can’t be truthful and disclose to you the true value of their assets and liabilities:
You Protect Yourself.
This is definitely going to set a precedent, as new Capital becomes more expensive and comes with many strings attached.

Worse still, as investment banks look to dump Toxic CDO’s and avoid Mortgage related securities, the slowing MBS market is going to result in the unwillingness of Banks to lend to the Residential Housing market in the US.
If you are looking to buy the US Financials now that the worst is behind us - >Caveat emptor

TEMASEK HOLDINGS

“Temasek Holdings is an Asia investment house headquartered in Singapore. With a multinational staff of more than 300 people, we manage a portfolio of over S$160 billion, or more than US$100 billion, focused primarily in Asia. We are committed to fostering a sustainable future for our shareholder, staff, portfolio companies and the community.” http://www.temasekholdings.com.sg/

Temasek and The Government of Singapore Investment Corp operate as Investment Management Companies / Private Equity Arms / Sovereign Wealth funds of the Singapore Government. GIC was set up to manage Singapore's foreign reserves.

Over the years Temasek has been a long term investor mainly in Asian markets, acquiring sizable stakes in large companies.

Here is a list of its major investments as on 31st March 2007.

http://www.temasekholdings.com.sg/our_portfolio_portfolio_highlights_major_investments.htm#fs7

Here is a wikipedia link with recent updates of investment stakes held by Temasek.
http://en.wikipedia.org/wiki/Temasek_Holdings

For an accurate list of investment holdings, please refer to the annual statement from Temasek as of 31 March 2008, which will be put up later this year.

TEMASEK INVESTMENTS BY REGION AND SECTOR http://www.temasekholdings.com.sg/

Recent High Profile Investments

After its recent investment in Merrill Lynch, Temasek now owns approximately 9.4% of Merrill Lynch.

It recently announced that it owns 19% of Standard Chartered.(up from 13% on 31 mar 07)

Its sister concern, the Government of Singapore Investment Corp, invested almost $ 10 Billion in UBS AG recently.

The current activities of Sovereign funds such as Temasek mark an inflection point in the history of financial markets. With a shift of wealth and assets from west to east, investors from Asia are acquiring businesses in the west, during a crisis, at exceedingly low prices.
The new buyers will gain access to western markets, by acquiring well established businesses and brand names. They will also indirectly acquire a foothold in the subsidiaries of large multinational corporation businesses built up in Asia over the last few decades .
Over the long term, this will be the biggest loss for investors and business owners in the west, being forced to sell out when prices are down.