Business

Editor: evewen
16 Sep 2008 01:31:19 GMT

SINGAPORE, Sept 15 - Bank of America’s purchase
of Merrill Lynch in a $50 billion deal highlights the risk
Singapore’s Temasek and other sovereign funds took in betting
on a financial sector whose troubles are far from over.

The $131 billion Singapore state fund has ploughed over $5
billion into Merrill, but the value of the investment plunged
when the U.S. bank suffered massive losses from risky housing
debt, before Merrill agreed to halve Temasek’s purchase price
in July.

With an average price of between $23 and $24 paid per
Merrill share, Temasek could make a small paper gain given Bank
of America is paying $29 a share in an all-stock deal for the
third-biggest global investment bank.

Temasek will end up owning shares in Bank of America, a
bank with a much bigger franchise but with the challenge of
integration and dealing with Merrill’s bad debts. Analysts said
it was unclear if Temasek will sell or hold for the long-term.

“If you are a long-term investor and have a five- to
10-year horizon, then whether you make a profit or a loss on
Bank of America’s share price shouldn’t be an issue for you
now,” an analyst, familiar with the workings of the fund, told
Reuters.

A Temasek spokesman declined to comment on the sovereign
fund’s next move.

A second source with knowledge of the fund said Temasek is
waiting for more clarity from Merrill CEO John Thain on a
investor conference call later on Monday.

In Dubai, state-owned investment agency Mubadala said it
was not looking to bail out any financial companies in
difficulty.

“There is a good amount of volatility and it is not the
best time to invest,” Chief Operating Officer Waleed al-Muhairi
told Reuters. “Right now, we, like some others, will wait and
see.”

Mubadala had a 7.5 percent stake in U.S. private equity
firm Carlyle Group as of February.

With Lehman Brothers filing for bankruptcy on Monday, the
crisis has claimed the second major investment bank in the
United States after the U.S. government backed a fire sale of
Bear Stearns to JPMorgan in March.

Standard & Poor’s analyst Anshukant Taneja, which rates
Temasek AAA, told Reuters last month the fund’s large exposure
to financials increased its vulnerability to unpredictable
asset cycles and contagion.

But Temasek officials said then they saw opportunities in
financials and said the fund would not cap its investments in
that sector, which grew to 40 percent of its portfolio in the
year to end-March from 38 percent previously.

Temasek, headed by Ho Ching, the wife of Singapore’s prime
minister, has been expanding outside its Asian base and holds
stakes in Barclays and Standard Chartered

But analysts said the changing landscape means previously
strong growth in the financial sector would be crimped as banks
scale back risky investments.

“The next 5-10 years will see that over-expansion reverse
and it will be difficult for investors in financial assets,”
said Singapore-based Peter Douglas, founder of hedge fund
consultancy GFIA.