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GIC, UBS and the Death Spiral of your CPF funds

Kweku Adoboli the alleged rogue trader at UBS and Nick Leeson, the infamous rogue trader who brought down Barings, both have a strong Singaporean connection. Nick Leeson worked in Singapore while Kweku Adoboli worked for the bank whose largest shareholder is the Singapore government.

Singapore, through GIC, became the largest effective shareholder in UBS when it purchased a 9% stake of mandatory convertible notes in December 2007.  The Singaporean government was responding to a call by UBS at the time for a bailout following the subprime crisis.  In fact our generous bailout caused UBS which stood for Union Bank of Switzerland, to be given the nickname, “The United Bank of Singapore “in its home country

Kweku Adoboli appears to have lost the Swiss bank an estimated minimum of $2.3 billion. But his losses only represent a fraction of the total losses that GIC has made in UBS so far.  UBS was trading at 50 Euros per share at the end of 2007 and just before the latest debacle it was trading around 11 Euros.  It had therefore already lost around 80% of its value before he added a further 2% loss to its 2007 market valuation. For GIC it appears this 80% loss probably amounts to S$7-8 billion assuming that the currency purchase was unhedged at the time. That may not seem like a huge amount in the context of GIC’s rumored total assets but we don’t know what percentage it represents of GIC’s equity. As the bonds issued to CPF by GIC have to be repaid it’s conceivable that GIC could end up with negative equity.

Anyway as the largest stakeholder in UBS any loss chalked up to them is going to send shock waves through GIC.  And as GIC’s assets are funded through borrowing in Singapore dollars from the CPF, your savings are directly linked to UBS’ fortunes. Furthermore this latest loss comes amid the start of a double dip recession. The rerun of the 2008 financial crisis looks potentially much more worrying this time around because governments appear to have given up on taking steps to offset it and can only repeat the mantra of fiscal austerity. With the latest announcement from the Fed ruling out a new round of quantitative easing, central bankers also appear to have given up on monetary policy.

The UBS losses have even provoked GRC into making a rare public statement resulting in a front page headline in the Financial Times on September 20th.

 “Singapore fund hits at UBS ‘lapses’. “   

The FT article went on to further quote from GIC’s statement,

“[We] discussed the alleged fraudulent trading that led to the large financial loss for UBS. GIC expressed disappointment and concern at the lapses and urged UBS to take firm action to restore confidence in the bank”.

Fine words indeed but is it not a case of locking the stable door after the horse has bolted? Yes, GIC is now belatedly hitting out at UBS for its lack of controls and lapses but are they just creating a storm in a tea cup to cover up a disastrous investment decision? If GIC is angry with UBS then Singapore citizens should be furious with GIC. As CPF members we the Singaporean citizens should be demanding some answers and explanations from our government.

GIC’s attempt to avoid transparency over its decision to invest in UBS by pinning the losses on a rogue trader, an external event outside of their control, won’t pass muster anyway. In fact there were plenty of warning signs in the public arena that something was seriously amiss at UBS, long before Mr. Kweku Adoboli was uncovered.

In 2008/9 UBS was embroiled in a tax evasion scandal in the United States.  The misconduct was so severe that UBS was faced with the loss of their banking license in the US. There are few sanctions harsher than that. The scandal centered on UBS’s wealth management division where employees had been helping US customers to evade taxes. One UBS whistleblower employee even testified to practices such as smuggling diamonds in empty toothpaste tubes! UBS finally kept their license by settling out of court and agreeing to pay US$780 million to the US government in April 2009.

Not long after this in November 2009 the UK’s Financial Services weighed in against UBS.  The Authority fined UBS £8 million citing their “inadequate systems and controls” over 6 employees in the wealth management division who had been making unauthorized trades using customers’ money.  UBS was also forced to pay out US$42 million to compensate its customers for the losses.

Now in 2011 we are told that GIC expresses “disappointment and concern at lapses”. Seriously guys, where have you been?  As a minority stakeholder in a country that represses dissenting views I can do nothing more active than express disappointment.  But in 2007 and again in 2010 GIC was the largest single shareholder in UBS and as the largest shareholder they had considerable clout.  So the question should be why did GIC make no public effort to improve performance or risk controls over the last 4 years?  Why did GIC not go public with their concerns before now as an activist hedge fund or asset manager would have done?

It may be that as a public entity they were sensitive to charges of political interference and the kind of backlash they saw when they bought Shin Corp in Thailand. If this is the case it simply strengthens the argument against having a sovereign wealth fund in the first place.

The real question is what were GIC doing investing in a deal whose implicit risk they appear not to have understood and via an instrument they shouldn’t have touched with a barge pole? Certainly if reports on Bloomberg are true then they made the decision to invest with unnecessary haste and little due diligence.

Mandatory convertible bonds are instruments which have to be converted into shares of the underlying equity on maturity. They are aptly known as “death spiral” bonds in the investment industry.  This is because they represent an inevitable large dilution of the outstanding equity of the company issuing the bonds.  The coupon may seem juicy but it stems from the fact that the investor has sold a put on the shares to the issuer. If the option was stripped out and sold separately it would undoubtedly look cheap at the price GIC sold it, particularly as UBS had inside information about the true state of the bank.

Ironically UBS knows about the risks of death spiral” bonds. They themselves lost a lot of money in 1997 from buying mandatory convertible bonds issued by Japanese banks. In this case the banks’ equity prices promptly traded down towards the mandatory conversion price, set roughly 50% below where the equity was trading prior to the issue. Had UBS learnt something from that experience?  As far as I’m aware they only started to issue their own death spiral bonds after their fingers were burnt by the Japanese.

The only other major stakeholder in the UBS bonds at that time was an unnamed Middle Eastern investor in Abu Dhabi who bought a $2 billion stake. But then he probably had money to burn, literally, as he would be investing oil derived revenue and not the savings of his hard working citizens.

In any event the bail out by GIC didn’t change UBS’ fortunes. The losses were so severe that by 2008 they looked set to go bust until this time the Swiss government stepped in with an emergency rights issue in October of that year. Had they not done so GIC would have lost all their money. In 2009 the Swiss government sold its own stake, at a healthy profit I might add. Yes, the Swiss government was prudent enough to get out at the height of the market but GIC held on! I fear that MM Lee thinks he is Warren Buffet who famously holds positions for 30 years.

We can only speculate as to why MM Lee felt that we needed to use our pensions to bail out a foreign bank especially at a time when the industry was already reeling from the subprime crisis. At the time, as Chairman of GIC, he was quoted in a Bloomberg interview in April 2008 saying

“The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again. Will there be another Swiss bank like UBS for wealth management? I doubt it, we doubt it, that is why we invested in it.”

Clearly the salesmen’s patter got the better of the Chairman of GIC, Mr. Lee Kuan Yew, and of the investment committee at GIC when they took the decision to invest in December 2007. Or the GIC decision makers were so blinded by the thought of the enormous returns they were going to make that they were unable to look at the downside risks.

But GIC did have the benefit of hindsight and experience when they made their statement on  September 20th which continues with a chilling echo of MM Lees naïve views of 2008,  “GIC’s view of UBS’s fundamental strength as a well capitalized bank with a strong private wealth management franchise remains unchanged,”

 When GIC talks about a strong wealth management franchise they are singling UBS out as a brand consistently capable of making money through wealth management. I agree that smuggling diamonds out in toothpaste tubes is a strong way to generate wealth for your clients and if it weren’t illegal, I too would love a piece of that franchise.

It would be an interesting academic exercise to see what lessons both Temasek and GIC have learnt from the previous crisis, if the consequences were not so serious for Singaporeans. Judging by GIC’s statement above we must presume they have learnt very little.

The UBS debacle is an illustration of how the concentration of the power to make such large investment decisions in the hands of a few individuals is so dangerous. Particularly as there appears to be no accountability for those investment decisions later as there would be if Temasek or GIC were in the private sector. Let’s not forget that it is our money the managers are playing with. If this were a hedge fund or conventional asset manager that had performed poorly, then we, the ultimate owners of these assets, could take them away and give them to another manager. Unfortunately we do not have that option.

Tony Tan our (35%) elected President was deputy Chairman of GIC at that time so clearly there is a potential conflict of interest here and we should expect no efforts at improving transparency or oversight from that quarter. This is the reason why I have called for Temasek and GIC to be privatized and listed so that we can gain some much needed transparency and can become the majority shareholders in our own assets.

So to answer MM Lee’s questions, “Will there be another bank like UBS for wealth management?” Will there never be employees making unauthorized trades with clients’ money?  Will there never be another rogue trader? I doubt it, we doubt it, that is why Singaporeans need greater control over their investments.


  1. We look forward to October’s parliamentary sitting and hope the non-PAP MPs will fire good questions at the Ministers on the UBS fiasco, as well as how our CPF funds are currently managed.
    Tony Tan should never have been elected as President, especially as he promoted himself as a person with vast financial experience, and not someone who has made very poor financial decisions for GIC/TH. We really do not need this financial expert who can now hide under the new presidency and escape scrutiny for his financial stupidity.


    • Sure the call has been picked up by many others. The more people scrutinising the figures the better, in my opinion. Actually the government only stated mentioning productivity after I had raised and highlighted our abysmal figures. They still take to quoting pure GDP figures whenever they can and therefore are still only paying lip service to concerns over productivity.


  2. more importantly than our CPF lousy investments , it is the 2 years of NS that is killing Sg that drain it of much need global talents. the brain drain is by far the most deadly sin commited the PAP govt on this island.

    One year of brain drain does not matter much but after 40 years of continuous blood letting , sg now is no more competitive globally.


  3. Not only are we facing the risk of a double-dip recession, we are also looking at a possible unravelling of the Euro.

    In today’s newspapers (Today 23 September), the MOF has responded to a reader’s letter saying that revealing the full extent of GIC’s portfolio would be “… against our national interest. It would make it easier for speculators to attack the Singapore dollar during periods of vulnerability. Further, our reserves are a strategic asset, especially for a small country with no natural resources or other assets.

    “It would be unwise to reveal the exact amount at our disposal for defending our currency, or for use in an emergency” said the ministry.

    My question is, how does The Government Pension Fund of Norway manage to run its fund (the world’s largest sovereign wealth fund), with complete transparency? Norway’s population is comparable to that of Singapore’s and its GDP in ppp terms is actually smaller. As for natural resources, its oil reserves will decline substantially over the next 20 years and disappear in about 50 years.

    The fund industry knows that 60% of GPF’s assets are invested in equities and that it lost a quarter of its value after the financial crisis of 2008. Yet we have not seen a run on the Kroner. Are we to assume the GPF knows something that GIC doesn’t (hard to believe considering the stratospheric salaries paid by the Singapore government to its top bureaucrats; the Chairman of GIC, Mr Lee Kuan Yew until recently drew close to $4 million from his Cabinet position alone)?

    The MOF’s statement propagates another myth in a long list of myths that Singaporeans are fed on.

    Here are a few links with information or news reports on Norway’s GPF to show how open they are with information:


  4. What is the bottom-line figure?

    6.4 percent single largest share holding in UBS means what to GIC?

    It is just a loss of US$147 million on a total fraud loss of US$2.3 billion.

    More importantly is the concern on share market confidence on UBS and has the share price of UBS fallen?

    Why GIC/MAS did not mention this US$147 million figure in their replies to allay misplaced concerns and disappointment when the amount suffered by GIC is smaller than the peanut?


    • This is more or less exactly what I say in my post. The losses by the alleged rogue trader are merely a drop in the ocean. By a rough estimate they add another 1 or 2% to the 77% losses that GIC has incurred overall since it took its stake in 2007. You ask about investor confidence and whether the share price has fallen but this is surely a rhetorical question. Isn’t it? UBS was trading at around 50 Euros a share when GIC took its stake and last I looked it was trading at 11 Euros a share. As for investor confidence, very briefly UBS was in trouble when GIC stepped in. They then came perilously close to collapse losing a record £35bn following the US sub-prime housing crash and were saved by the Swiss government stepping in. Since then there have been the scandals and punitive action taken by financial regulators in the US and the UK as detailed in my post and others major losses that I haven’t mentioned. It is for this reason that I say GIC’s statement is chilling in its endorsement of UBS as a wealth management franchise. Even UBS themselves who acquired Command House to set up a “Wealth Management campus, Asia Pacific” here in Singapore renamed it the Business University last year.


  5. MAS’ letter in Today Voices 23 Sept 2011 has again failed to allay the concerns of Singaporeans.

    It has not revealed whether GIC has disclosed the total investments and profitability statements to MAS, the Minister of Finance, and the Cabinet periodically and annually.

    It has not revealed whether MAS, the Minister of Finance, and the Cabinet keep a watchful eye on GIC.

    It does not reveal who is responsible to question GIC, if there is a need to do so since the EP does not have the power to review the accounts of GIC.

    I hope the Govt will make their stand clear on this.


    • Hi, Again this is what I tried to make clear during the campaign for the elected presidency. The President’s role doesn’t include the power to perform an oversight function on GIC or Temasek and additionally current (35%) President Tony Tan was previously deputy chairman of GIC. People were and still are confused about the extent of his powers. The money in CPF is ours. Well at least some of it is mine, I’m not sure if you are invested. Why are we Singapore citizens so sanguine about handing over our money to be locked away in a black box? My proposal is to publicly list Temasek .


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