Serious Anatomy of a S’pore Financial Disaster: GIC’s investment in UBS

[Papsmearer]

Recent news in the media about the sale of a large stake of UBS bank shares to institutional investors by GIC and the unsurprising dearth in detailed reporting on the losses suffered prompted me to attempt to put some numbers on the matter.

Background:


In the subprime mortgage crisis of 2007/2008, many big banks were hit badly and many went under or were merged. These were toxic banking stocks, which were sitting on a mountain on non performing subprime debt. Banks making questionable housing loans packaged these loans into bundles to sell to investors, and used rating agencies to give the debt (bonds) an appearance of being investment grade quality. Many professional and institutional investors were staying away from the banking stocks, including Warren Buffet. For example, Buffet bought Goldman Sachs in 2011 after the blood had run its course on Wall Street for a bargain price and eventually earned over USD$2 billion on his stake’s appreciation.


The mechanics of the Investment


For reasons unknown to the citizens of Singapore, GIC decided to make an emergency capital injection of USD$10 billion investment into UBS, in other words, it became UBS’s knight in shining armour, in March 2008. No business case has ever been revealed as to why a sovereign wealth fund supposedly run by the highest paid civil servants in the world would buy into a toxic banking stock, other then to assume that GIC was gullible and deceived into making the investment. GIC’s investment of USD$10 billion (approximately S$13.9 billion) was converted into Swiss Franc, equivalent to approximately SF$11 billion. The actual investment itself was not in UBS common shares, nor convertible preferred shares (how Buffet bought his Goldman Sachs shares), but instead, it was in mandatory convertible notes with a coupon rate of 9%. In other words, UBS sold GIC its own IOUs. But the worse feature of the notes that GIC bought was the mandatory convertible feature. This feature stipulated that these notes must be converted to UBS common shares in 2 years time. There is no way out of this. The risk that GIC did not foresee was that the UBS common share price will tank in the 2 years that it has to convert the notes. A prudent investor would have known how desperate all banks were to receive cash infusion in the face of looming crisis and should have demanded say a 10 year convertibility clause at its own discretion. In other words, the notes can be converted at any time by the investor into shares within a 10 year window. I am certain that a desperate UBS would have would have agreed to this or any other clause. It was this clause that caused the losses suffered in UBS.


In 2010, at the maturation of the 2 years, the SF$11 billion investment was duly converted into common shares. At the time of the initial investment of SF$11 billion into the UBS notes, it was agreed that these notes would be converted in 230.7 million UBS common shares. This place the initial investment conversion price at SF$47.7 per share. (SF$11 billion divided by 230.7 million shares). But in 2010 when it came time to convert, the UBS shares were only worth SF$15.86 per share, making the total investment worth only SF$3.659 billion, and making the immediate paper loss equal to SF$7.341 billion or an average loss of over USD$3 billion a year. The conversion made GIC the largest investor in UBS at 6.6% ownership. The current stake of 93 million shares being sold is equivalent to 2.4% ownership.


The Calculation:


Price per share at initial investment = SF$47.7 per share.

Selling price per share for 93 million shares = SF$16.6 per share.
Actual loss = SF$2.89 billion


Interest income at 9% coupon rate for 2 years = SF$2 billion X .363636 (pro-rated) = SF$727 million


Forex difference: Investment was made by GIC converting USD into Swiss Franc. Since the initial investment, the Swiff Franc has gone down 10% versus the USD. Since this sale takes place in Swiss Franc and is converted back to USD, GIC also takes a 10% Forex loss on the investment. This is equivalent to another SF$289 million in losses.


Dividend history based on 230.7 million common shares:

2010 – No dividend distributed
2011 – 0.10 Francs X 230.7 million = SF$23.07 million

2012 – 0.15 Francs X 230.7 million = SF$ 34.605 million

2013 – 0.25 Francs X 230.7 million = SF$57.67 million

2014 – 0.5 Francs X 230.7 million = SF$115.35 million

2014- Supplemental dividend 0.25 Francs = SF$57.67 million

2015 – 0.85 Francs X 230.7 = SF$196 million
2016 - 0.6 Francs X 230.7 million = SF$138.42 million

Total dividends earned (approximately before tax) = SF$622.785 million


Total calculations (please note that these are best guess and without access to GIC information) in Swiss Francs


Realized loss $2.89 billion

Forex loss $289 million

Gross losses $3.179 billion

Less:
Interest income $727 million

Dividend income $622.785 million

Net losses $1.829 billion


Remember this is loss suffered only on the sale of this stake. GIC stills owns a substantial remaining stake, under 5% of the company. Finally, remember these famous last words?


Tony Tan said on Jan 29[SUP]th[/SUP] 2011 :



“We look to continue to hold on to our stakes in UBS and Citigroup for many years to come,” Tony Tan, deputy chairman of the Singapore sovereign wealth fund, said in a Jan. 29 interview at Davos, Switzerland, where he attended the World Economic Forum meeting. ‘But one never says never; if someone offers an extremely high price, of course we’ll look at the possibility.”


The only problem is that A) they did not hold it for many years to come B) No one offered them an extremely high price.

[FONT=&amp]Let’s be clear on one thing, citizens of Singapore. The PAP are not the smartest guys in the room[/FONT]

 

[ckmpd]

Thanks, papsmearer.

 

[Papsmearer]

[h=1]Disappointed With UBS Loss, Singapore's GIC Fund Cuts Stake[/h] by Elisa Martinuzzi
, Jan-Henrik Foerster
, and Klaus Wille

UBS Group AG’s largest shareholder, Singapore’s sovereign fund GIC Pte, is slashing its ownership in the Swiss bank by offering a 2.4 percent stake worth about $1.6 billion.“Conditions have changed fundamentally since GIC invested in UBS in February 2008, as have UBS’ strategy and business,” GIC Chief Executive Officer Lim Chow Kiat said early Tuesday in a statement. “It makes sense now for GIC to reduce its ownership of UBS and to redeploy these resources elsewhere,” Lim said. GIC is “disappointed” that it lost money on the investment, according to the statement.
UBS is managing the sale, the Zurich-based bank said in an earlier statement. GIC said it previously owned 5.1 percent of the Swiss bank’s shares and that it will now own 2.7 percent. GIC is selling 93 million shares through an accelerated bookbuilding to institutional investors.
GIC invested in Switzerland’s biggest bank early in the financial crisis, purchasing debt that converted into stock when UBS needed capital to cover losses on subprime mortgage bonds. In 2010, the Singapore wealth fund became the bank’s largest investor after the securities were converted into stock. UBS has since given up its ambitions to become a top global investment bank, focusing instead on the more predictable business of wealth management.
[h=3]‘Rare Chance’[/h]
GIC’s shift from UBS comes as the investor has warned that it is bracing for lower returns amid elevated market volatility and persistently low interest rates. The sovereign fund, which invests Singapore’s foreign reserves, said in July that a key measure of returns fell to 4 percent in the 20-year period ended March 31, 2016. In the past year, GIC has embarked on a series of leadership changes and elevated many investment managers to key roles.
The 2008 crisis “offered a rare chance to take major stakes in the international banking sector,” GIC said in its statement. The fund made a profitable investment in New York-based Citigroup Inc.
“The combined return on the UBS and Citigroup investments has been positive in mark-to-market terms,” GIC added in a later statement.
“GIC lost a lot of money on its UBS stake, so looking at both investments in totality is a way of softening the blow of that loss,”said Song Seng Wun, a regional economist at CIMB Private Bank in Singapore. “It is a sensible thing to try to get the money back by shifting into other opportunities as there are certainly plenty.”
Jeffrey Jaensubhakij, GIC’s new chief investment officer, has said technology and health care may offer promising investment opportunities over the next decade, as muted global growth weighs on returns from traditional assets.
To read more on GIC’s investment thesis, click here.
"Maybe GIC just found better ways to invest their money, maybe they had enough of banking,” said Peter Casanova, a Kepler Cheuvreux analyst.
UBS shares fell 1.3 percent to 16.61 francs in Zurich, erasing earlier gains. The stock has climbed 4.1 percent this year, though it’s still well below where it traded in December 2007, when GIC first announced its investment.
UBS at the time was raising capital amid a $10 billion writedown on subprime mortgage investments. The infusion wasn’t enough to avoid a bailout the following year, when UBS’s toxic investments were moved to a fund backed by the country’s central bank.
By the time GIC completed the conversion of its 11 billion Swiss francs ($11 billion) of notes, the stock had lost about two-thirds of its value, though the unrealized loss was partly offset by interest payments.

 

[Papsmearer]

How Warren Buffett made $10 billion during the financial crisis

Back in 2008, when investors were racing for the exits amidst a global economic meltdown, Warren Buffet coolly threw a lifeline to a few companies even though their stock prices were dwindling. Now that the economy is on the road to recovery, Buffett's returns are coming in. And surprise, surprise — the deals paid off.
The profits from the Oracle of Omaha's crisis-era deals have raked in "$10 billion and counting," says The Wall Street Journal.
The deals Buffett's Berkshire Hathaway made from 2008 to 2011 involved giant, blue-chip companies like Mars, Goldman Sachs, Bank of America, and Dow Chemical. Taking advantage of the general atmosphere of panic, Berkshire Hathaway was able to use its "gigantic cash hoard to move swiftly and exact lucrative terms that created a stream of payments from the borrowers," says the Journal.
For example, Buffett pumped $5 billion into Goldman Sachs shortly after Lehman Brothers collapsed, a massive boost of confidence in Goldman that shored up its stock price. Buffett bought $5 billion in preferred shares, and as part of the deal won warrants for an additional $5 billion worth of common shares.
In 2011, Goldman bought back the preferred stock for $5.64 billion, and handed Buffett a $500 million bonus. Then last week, Buffett exercised the option on 13.1 million common shares for a value of about $2.07 billion.
Another example: Buffett helped finance Mars' $23 billion purchase of Wrigley back in the spring of 2008, at a time when big-time acquisitions were quickly falling out of fashion. Mars recently bought back $4.4 billion in bonds from Berkshire Hathaway, resulting in about $680 million in profits for Berkshire, says the Journal.
So is there anything the average investor can learn from the Oracle? For one, Buffett didn't allow himself to be rattled by chaos that had engulfed the markets, instead turning an analytical eye on Goldman's business and correctly concluding that the investment bank would be spared the kinds of losses that wracked its competitors.
The Mars-Wrigley deal also saw Buffett ignore the background noise, putting a lot of money down on a deal so fundamentally solid that it would be boring without Buffett's participation.
Which brings us to the real key to Buffett's success: Being Warren Buffett. When you've got the Midas touch, nearly every deal you make boosts investor confidence in the company in question, turning its success into a self-fulfilling prophecy. And that's something no one can learn, no matter how many "Woodstocks for Capitalists" they attend.

 

[Narong Wongwan]

GIC and Temasek should just sack all of their useless staff and put all their money into BH and Apple. And just sit back do nothing and collect money

 

[ckmpd]

GIC and Temasek should just sack all of their useless staff and put all their money into BH and Apple. And just sit back do nothing and collect money

PAP wants GIC and TH the way they are now. GIC and TH serve PAP's strategic objectives. Their gambling losses are borne by singaporeans. so what's the problem?

 

[Reddog]

No problem. Only CPF money.

 

[mojito]

Disagree. Smartest or not depends on which room.

 

[ckmpd]

No problem. Only CPF money.

That's the problem...because it is CPF money

 

[virus]

i think TS missed out opportunity cost, the loss can be sufficiently manifold

 

[mojito]

i think TS missed out opportunity cost, the loss can be sufficiently manifold

We could have lost more money elsewhere if not in UBS. We need to account for that too.

 

[virus]

GIC and Temasek should just sack all of their useless staff and put all their money into BH and Apple. And just sit back do nothing and collect money

where is all the so called good for nothing ministars who should be calling for the head of temashake to come clear and tell her the ancient china story of monkey who got his middle finger and cock chopped off.

 

[virus]

We could have lost more money elsewhere if not in UBS. We need to account for that too.

Jim rogers once said

Singapore that recently made large investments in Citigroup and UBS AG (UBS, news, msgs) are likely to lose a lot of money on their ploys. "They're making a big mistake; these banks have many more problems still ahead.

 

[Narong Wongwan]

i think TS missed out opportunity cost, the loss can be sufficiently manifold

Also haven't factor in dividend tax.

 

[Narong Wongwan]

We could have lost more money elsewhere if not in UBS. We need to account for that too.

Wow you're even more ah Q then our chootchew.
Ya why not say if never touch put in bank still got interests.

 

[frenchbriefs]

The actual investment itself was not in UBS common shares, nor convertible preferred shares (how Buffet bought his Goldman Sachs shares), but instead, it was in mandatory convertible notes with a coupon rate of 9%. In other words, UBS sold GIC its own IOUs. But the worse feature of the notes that GIC bought was the mandatory convertible feature. This feature stipulated that these notes must be converted to UBS common shares in 2 years time.

i dunno anything about UBS bank,but this is actually a pretty good deal for Temasek no?basically the deal temasek got was it gave 11 billion swiss francs to UBS as a loan at 9 percent interest....if u watch shark tank alot,these types of loans are pretty common and is pretty good for the shark investors,not as fantastic as equity deals but not as risky either and a surefire to make some money,what happens is the sharks are guaranteed their money back after a short period of time usually a few years at a interest rate usually between 9 to 12 percent,and as a teaser at the end of the deal,they get a small taste of the pie,usually like 5 percent equity of the company or something.of course they only offer these deals to companies that have shown strong sales in the past,strong growth,great cashflow and margins and a strong balance sheet.this is also great for entrepreneurs who urgently require cash for a reason,like expansion to meet demand,but also do not wish to dilute their shareholdings by selling away 30 percent of the company or something.

also i assume this convertible note is like an call option,it gives the buyer the option to buy a certain share in the future at a certain price.either the note was to be converted to stock at the market price,or at a predetermined price to limit the price they have to pay to ensure maximum upside should the stock rise...the target date was 2010,when the market has made a strong recovery,stocks everywhere should have been carried by the rising tide of recovery,they should have made a ton of money if everything went well,i supposed they picked a lemon,UBS probably had huge exposure to subprime or something.

but why the hell would they set the predetermined price at SF$47?thats insane......i cant find any UBS stock data before 2009 nov,so i dunno what price UBS was at,but why not just invest in the common stock straight at $16 a pop if they wanted to invest in UBS?or just have it convert at market price so u dont make or lose anything,but u earn 9 percent interest in the meantime,or buy a bunch of options?what is the point of this deal even?why set the price so high u are guaranteed to lose?is there any source confirmation on the $47 share price?whats the point of being a huge soverign fund and having massive capital if u dont use ur bargaining power?

 

[ckmpd]

We could have lost more money elsewhere if not in UBS. We need to account for that too.

cannot say like that. how much wld GIC get for risk free investment for S$12B for 10yrs?

 

[ckmpd]

Wow you're even more ah Q then our chootchew.
Ya why not say if never touch put in bank still got interests.

yes...that is one fair way of calculating. how much risk free interest for 10years

 

[frenchbriefs]

ZURICH, Switzerland — Swiss banking giant UBS AG said Monday it will write off a further $10 billion on losses in the U.S. subprime lending market and will raise capital by selling substantial stakes to Singapore and an unnamed investor in the Middle East.

UBS will now record a loss for the fourth quarter and said “it is now possible that UBS will record a net loss attributable to shareholders for the full year 2007.”

UBS said that the government of Singapore Investment Corp., or GIC, is investing $9.75 billion, while an undisclosed strategic investor in the Middle East is contributing the other $1.77 billion.

As recently as the middle of November, UBS had predicted a profit for the fourth quarter despite ongoing speculation about its subprime holdings.

“Conditions in the U.S mortgage and housing markets have continued to deteriorate, and we have updated our loss assumptions to the levels implied by the current distressed market for mortgage securities,” the company’s chief executive, Marcel Rohner, said in a statement.

“In our judgment these writedowns will create maximum clarity on this issue and will have the effect of substantially eliminating speculation,” he added.

“UBS revises its outlook for its fourth quarter 2007 from an overall Group profit, as anticipated in its announcement of 30 October 2007, to a loss. It is now possible that UBS will record a net loss attributable to shareholders for the full year 2007.”

In October the bank downgraded the value of some assets by over $3.4 billion because of losses linked to the U.S. mortgage crisis.

The writedown meant UBS posted a net loss of $712 million in the period ending Sept. 30, the first quarter in nine years in which it suffered an operating loss.

Tony Tan, deputy chairman of GIC, said the 9 percent stake does not mean Singapore is seeking control of the Swiss bank.

“GIC is now the single largest investor in UBS and this is the largest investment GIC has made in any company,” Tan said during news conference in Singapore. “We did not make it a condition that our investment should have a representation (on UBS’s board.) We have no desire to control the business of the bank.”

It was the first time that the publicity-shy GIC, which manages Singapore’s foreign reserves, has revealed a major investment.

Western banks have lost billions of dollars from their exposure to U.S. subprime loans, and cash-rich sovereign wealth funds have been stepping in to help them boost their capital. Last month the Abu Dhabi Investment Authority, the sovereign investment fund of the Gulf Arab state, acquired a 4.9 percent stake in Citigroup Inc., the nation’s largest bank, for $7.5 billion.

UBS said it attracted about 30 billion Swiss francs in new money from clients in October and November. Ensuring a strong capital base will allow the bank to continue to make acquisitions to further expand its wealth management business, when such opportunities arise, UBS Chairman Marcel Ospel told a conference call.

“Our losses in the U.S. mortgage securities market are substantial, but could have been absorbed by our earnings and capital base,” Ospel said in a statement.

“The write-downs and capital raising represent a dramatic U-turn from guidance given by Chief Financial Officer Marco Suter just three weeks ago,” said analysts Matthew Clark and Vasco Moreono of Keefe, Bruyette & Woods Ltd.

The fact that the capital-raising outweighs the write-down makes it appear that UBS is trying to draw a line under its subprime woes, Clark and Moreono said.

 

[Papsmearer]

i think TS missed out opportunity cost, the loss can be sufficiently manifold

I did consider that, but this was a rushed article I pumped out. its hard to calculate the opportunity cost, so I just went with the proven losses calculation. However, if you say that GIC could have easily distributed the same USD$10 billion among local mutual funds with good 10 year records, they would have earned over 20% a year in appreciation in some cases.

Top/Worst 5 Performing Funds (10 Years) [TABLE="class: gridTopWorstBorder, width: 360"]
[TR]
[TD="class: gridHeaderStyleBW"][/TD]
[TD="class: gridHeaderStyleBW, align: left"]Fund Name[/TD]
[TD="class: gridHeaderStyleBW, align: center"]Return
(%)[/TD]
[/TR]
[TR="class: gridRowStyleBW"]
[TD]1[/TD]
[TD="align: left"]First State Regional India Fund[/TD]
[TD="align: center"]211.57[/TD]
[/TR]
[TR="class: gridAltRowStyleBW"]
[TD]2[/TD]
[TD="align: left"]Aberdeen Thailand Eq Fund[/TD]
[TD="align: center"]151.95[/TD]
[/TR]
[TR="class: gridRowStyleBW"]
[TD]3[/TD]
[TD="align: left"]Allianz Informationstechnologie EUR (DE0008475120) (Closed)[/TD]
[TD="align: center"]148.71[/TD]
[/TR]
[TR="class: gridAltRowStyleBW"]
[TD]4[/TD]
[TD="align: left"]Fidelity Thailand Fd A USD[/TD]
[TD="align: center"]147.22[/TD]
[/TR]
[TR="class: gridRowStyleBW"]
[TD]5[/TD]
[TD="align: left"]UOB United Global Healthcare Fd[/TD]
[TD="align: center"]136.45[/TD]
[/TR]
[/TABLE]