Friday, December 21, 2007

Merrill Gains on WSJ Report of $5 Billion Temasek Investment

(Bloomberg) -- Merrill Lynch & Co. rose in German trading after the Wall Street Journal reported that the world's biggest brokerage firm may receive a cash infusion of as much as $5 billion from Singapore's state-owned Temasek Holdings Pte.

Merrill climbed 3.3 percent, the biggest gain in more than two weeks, to $56.32. The New York-based firm, reeling from the biggest loss in its 93-year history, would join Citigroup Inc., Morgan Stanley and UBS AG in tapping a sovereign wealth fund for capital. Temasek's board has given preliminary approval for the investment, the Journal said, citing people it didn't identify.

Government funds ``are making use of the crisis to buy some of these banks on the cheap,'' said Nicholas Yeo, who helps oversee more than $40 billion in Asian equities at Aberdeen Asset Management in Hong Kong. ``Whether they're buying cheaply enough is hard to say.''

Merrill has declined 19 percent in New York Stock Exchange composite trading since the company announced $8.4 billion of writedowns on mortgage-related investments and corporate loans on Oct. 24, and then ousted Chief Executive Officer Stan O'Neal. The company, now led by former NYSE Euronext CEO John Thain, may disclose an additional $8.6 billion of writedowns for the fourth quarter, estimates David Trone, a New York-based analyst at Fox- Pitt Kelton Cochrane Caronia Waller.

Rob Stewart, a Hong Kong-based spokesman for Merrill, declined to comment. Officials at Temasek, the biggest shareholder of Standard Chartered Plc and DBS Group Holdings Ltd., also declined comment. Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Temasek Returns

Set up in 1974 to run state assets, Temasek now has more than $100 billion of investments, including controlling stakes in seven of Singapore's 10 biggest publicly traded companies. It holds 28 percent of DBS, Singapore's largest bank.

Temasek, owned by Singapore's finance ministry, has notched up an 18 percent average annual return since its inception. It raised more than $800 million in the past month selling part of its stakes in China Construction Bank Corp. and Bank of China Ltd., the nation's second- and third-largest lenders.

Governments in the Middle East and Asia have agreed to invest about $25 billion in Wall Street firms since banks began to disclose subprime losses.

Citigroup, the biggest U.S. bank by assets, said Nov. 27 that Abu Dhabi would invest $7.5 billion in the New York-based company. State-controlled China Investment Corp. is buying an almost 10 percent stake in New York-based Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss of $9.4 billion from mortgage-related holdings on Dec. 19.

Sovereign Funds

Government of Singapore Investment Corp., along with an unidentified Middle Eastern investor, agreed this month to inject 13 billion Swiss francs ($11.2 billion) into Zurich-based UBS, the biggest Swiss bank. The government fund manager, known as GIC, manages more than $100 billion of the nation's foreign reserves.

Investments by sovereign funds may give some respite to banking stocks battered by more than $80 billion of credit- related related losses at the world's biggest financial institutions.

``These things tend to be good signs for the market,'' said Masafumi Oshiden, a Tokyo-based fund manager at BlackRock Japan Co., whose parent company manages $1.1 trillion. The investments help ``take away the fears and concerns, and lack of clarity going forward, so generally, it's positive.''

`Big Checks'

Bear Stearns Cos., the securities firm that helped trigger the collapse of the subprime market, struck an agreement in October with China's government-controlled Citic Securities Co. for a $1 billion cross-investment. The New York-based company announced a $1.9 billion writedown on mortgage losses yesterday, sending the firm to its first quarterly loss since it went public in 1985.

Government agencies ``may feel there are bargains out there,'' said David Cohen, an economist at Action Economics in Singapore. ``They can write big checks and these banks appreciate that.''

Merrill has slumped 42 percent in NYSE trading this year, reducing the market value to $46.7 billion.

Your Guide to SWF Bank Investments

(Felix Salmon) Here's a handy cut-out-and-keep guide to SWF bank investments, in the wake of the latest speculation about Merrill Lynch selling a stake to Singapore's Temasek.

Date Bank Fund Country Size
March 06 Standard Chartered Temasek Singapore $4 billion
November 07 Citigroup ADIA Abu Dhabi $7.5 billion
December 07 UBS GIC Singapore $9.7 billion
December 07 UBS ? ?Oman? $1.8 billion
December 07 Morgan Stanley CIC China $5 billion
January 08? Merrill Lynch Temasek Singapore $5 billion

For in-depth analysis, I'd recommend Setser:

The irony here is immense.
A few years ago the consensus view in the US financial community was that China's state would have to relinquish control of Chinese banks in order for China's financial sector to develop. State ownership was generally considered an impediment to a modern financial system. But rather than selling controlling stakes in China's state banks to Wall Street firms, China's state is now buying (non-controlling) stakes in Wall Street firms.
Talk about a change...
Remember when the US was criticized for using the IMF to foist privatization on the world? Now both the US government and large Wall Street firms rely heavily on non-democratic governments for financing -- and the US is, in a limited sense, importing other countries form of capitalism. The US government hasn't historically owned large stakes in US banks and broker-dealers.

I'd also note that a friend of mine on Wednesday wondered whether he, too, might be able to buy some mandatory convertibles: the deals looked attractive to him, with their high coupons for a couple of years and conversion into blue-chip bank stocks. Given the reception that the banks have received from the sovereign wealth funds, why don't they try the public markets? There might well be quite a bit of appetite for a large mandatory-convert issue: for one thing, it essentially guarantees dividends during a period when many banks must be thinking of cutting theirs.

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