A Decade Too Late GIC Finally Decides to Cut Its Losses
A couple of days ago GIC announced that they had sold almost half their stake in UBS, cutting their shareholding from 5.1% to 2.7% and at the same time ceasing to be the largest single shareholder. This partially closed the chapter on a disastrous investment in UBS that began in December 2007 when they allowed themselves to be suckered into buying a 9% stake in UBS through the instrument of mandatory convertible notes.
I wrote about this back in 2011 shortly after UBS announced another large loss, this time due to the rogue trader Kweku Adoboli (GIC, UBS and the Death Spiral of your CPF funds) which itself followed on the heels of having to pay $780 million to settle US charges that it had helped American citizens to evade tax. At that time the shares were trading at under CHF 10, about an 80% loss from the mandatory conversion price, if we exclude the value of the 9% interest that the notes paid for two years before they were converted automatically into shares of UBS.
I pointed out in my article that having a high coupon was a standard trick used by investment banks to gull unsophisticated and greedy or venal investors into selling cheap options. By buying the bonds GIC sold a put and purchased a call with the same strike price, in effect agreeing to buy shares at CHF 50 at some point in the next two years. The only control they had was over the timing of the conversion.
GIC have finally decided to cut their loss more than a decade later on close to 50% of their position. They are selling at a price of CHF 16 which represents a loss of about 66% in CHF terms. Some journalists have said that this loss was partially offset by the high coupon GIC earned in the two years prior to conversion and the dividends afterwards. While this is true, it is strictly not correct to take into account the dividends earned on the stock and the interest on the convertible without also adding in the interest or dividends GIC could have earned on alternative investments or the the future value of the income from selling a put option in UBS with the same strike. So I would prefer to look at the capital loss which on its total position, not just the shares sold, amounts to around US$6 billion or over SGD8 billion.
Some local commentators have written about the loss as though it is only now being crystallised. However the UBS position should have been marked to market and the loss taken a long time ago though as we are given zero information about GIC’s accounts it is impossible to know.
What we do know is that no heads rolled at GIC for the foolish decision to buy into UBS too early when its exposure to the US subprime market was only partially known. The senior management of UBS must have known how serious the situation was because only a few months later the bank went cap in hand to the Swiss government to ask for a bailout. The Swiss Government rescued the bank by funding an emergency rights issue at less than half the price GIC paid for shares, immediately diluting GIC’s 9.5% stake by more than 50%. While a strong case could be made that the senior management misled GIC as to the true state of the bank, GIC as sophisticated investors should have done better due diligence. Apparently Singapore’s willingness to generously bail out their leading bank led the Swiss public to laughingly refer to UBS as “United Bank of Singapore”.
The Swiss Government quickly sold out of the position in 2009 at a profit while our own government, impeccable at timing as always, clung on to the position for eight years in the hope that it would recover its money. There could be no surer sign that the management at GIC do not know what they are doing. In 2015 UBS’s stock reached a post-crash high of about 50% higher than where they just sold. If GIC’s management are looking for scapegoats they may be able to blame the purchase on LKY, who was Chairman of GIC at the time. In case anyone has forgotten President Tony Tan was Vice-Chairman and according to stories at the time was pushed to make a quick decision. Like naive victims of a “boiler room” scam, LKY and Tony Tan apparently salivated at the once-in-a-lifetime opportunity to own a piece of the world’s premier wealth management franchise. In my article I reproduced a quote from an interview LKY gave to Bloomberg back in April 2008:
“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.”
Serving as similar infallible contrarian indicators, Ho Ching and her pals at Temasek managed to panic sell out of their stakes in Barclays and Bank of America at the lows in 2009 while savvy investors like Warren Buffett were buying into the same banks.
These multiple public failures of our sovereign wealth managers are likely only the tip of the iceberg. They amply illustrate why we need the transparency and accountability that full disclosure on the lines of the Norwegian Pension Fund would bring. I have argued that this would be best achieved through a market listing for both Temasek and GIC if this were possible. If it is not possible then they should be dismantled and/or made to compete with private sector managers. Certainly GIC should not have a monopoly over the management of our CPF funds. We need to stop accepting that trite excuse traditionally used by incompetent managers and famously chanted by Tharman in Parliament when he was Finance Minister, that Temasek and GIC are investing for the long term. No doubt Bernie Madoff told his investors the same thing.
The ownership of a substantial stake in UBS has had at least one bonus for the PAP Government, though none for Singaporeans. In 2011 UBS published a survey of workers’ purchasing power in major cities around the world. This famously showed that Singaporeans enjoyed living standards on a par with workers in Moscow and Kuala Lumpur and well behind those in other Asian cities such as Seoul, Taipei, and Tokyo. This caused the Government some embarrassment and there were statements in Parliament that the basket of goods used for comparison purposes did not reflect Singaporeans’ consumption patterns. However, rather than defend itself in public, the Government resorted to its time-honoured tactic of getting UBS to drop Singapore from the survey. Either that, or like a good Singaporean and mindful of the need to spare its major shareholder further embarrassment, UBS decided to self-censor and quietly dropped Singapore from the survey in future years. The episode is rare proof of the extent to which the Government lobbies to ensure that only statistics that portray it in a favourable light get published.