Wednesday, November 19, 2008

MAS and Stat Boards invest in credit-linked notes as well

The ST article below highlights comments by Finance Minister Tharman regarding stat board investment exposure to credit-linked notes.

He did not reveal the identity of the 5th stat board, except to admit after questioning from NMP Siew Kum Hong that, "a fifth unnamed statutory board had financial products linked to CDOs and CDS, aside from credit-linked notes"

I think everyone would also like to know the name of that 5th stat board. Whats there to hide afterall? Because of this secrecy, I am left to speculate its either the CPF board, Public Transport Council, HDB or People's Association.

Thats the real problem with this whole crisis; too much secrecy.

Yes, yes, the 4 stat boards invested in credit-linked notes but these were not the ones that have experienced a "credit event". Should I be happy for them?

Just because they have yet to experience a "credit event" does not make them sound investments in the first place, as recent history suggests. But rather then to nitpick on investment choices and say "you should have known better", I have a feeling that everyone who is directly or indirectly affected by bad decisions and advice are more upset over the overall secrecy shrouding the issue.

Nov 19, 2008
5 stat boards' investments

THE Monetary Authority of Singapore (MAS) - Singapore's central bank and financial regulator - was among five statutory boards that invested in complicated credit-linked notes.

But none of the statutory boards - including the MAS - invested in notes that have now become worthless, such as DBS High Notes 5 and Merrill Lynch Jubilee Series 3 LinkEarner Notes.

The central bank had invested only 0.1 per cent of its portfolio in such investments, which in fact made a net gain over the past year.

A Ministry of Finance (MOF) spokesman, who revealed this to The Straits Times yesterday, did not give the actual size of the investment.

He was responding to queries after Finance Minister Tharman Shanmugaratnam told Parliament that five statutory boards had invested in credit-linked notes, but only named four: Singapore Civil Service College, Singapore Land Authority (SLA), Infocomm Development Authority of Singapore (IDA) and Professional Engineers Board.

Mr Tharman had emphasised in Parliament that the four boards had invested in credit-linked notes, but not the ones which have gone into default or suffered credit events that have caused their value to plummet to zero and triggered early redemption.

The notes that have suffered this fate include Lehman Minibonds, Merrill Lynch Jubilee Series 3 LinkEarner Notes, DBS High Notes 5 and Morgan Stanley Pinnacle Series 9 and 10 Notes.

Although he did not provide the actual amount invested by each of the four named statutory boards, he said that the exposure as a percentage of their total combined investment portfolio was only about 0.05 per cent.

These investments are currently suffering paper losses of about 14 per cent over the past year, he added.

'On a mark-to-market basis, these credit-linked notes held by the four statutory boards have not performed very differently from the performance of global markets generally this year,' he said.

'The four statutory boards are nevertheless monitoring the situation on all their investments, and will take the necessary steps to minimise any losses in these investments.'

MOF later told The Straits Times that the four statutory boards have had positive returns on their overall investment portfolios this year, averaging about 2 per cent.

And for the past three years, the average annual return on their investment portfolios had averaged 3 per cent.

Mr Tharman was responding in Parliament yesterday to questions from Non-Constituency MP Sylvia Lim, who asked whether statutory boards had invested in risky structured products which were linked to bankrupt United States investment bank Lehman Brothers.

Nominated MP Siew Kum Hong also wanted to know if those investments were linked to collateralised debt obligations (CDO) or credit default swaps (CDS), which are both complex investment products at the centre of the global credit crunch.

It was in response to Mr Siew's question that Mr Tharman revealed a fifth unnamed statutory board had financial products linked to CDOs and CDS, aside from credit-linked notes.

'These products comprise around 0.1 per cent of the statutory board's portfolio, and have in fact made a net gain over the year,' he added.

On how and why these statutory boards invest, Mr Tharman explained that all of them keep some surpluses for 'future capital expenditures and as a buffer against unanticipated spending needs or budget shortfalls'.

'They manage and invest these funds in financial assets to earn an appropriate return within acceptable risk limits, after taking into account their cashflow and liquidity needs,' he added.

According to Mr Tharman, statutory boards also have to ensure they have appropriate investment management structures for proper oversight of its financial investments with prudent risk management.


Daniel Ling said...

Hi, just wan to clarify to ensure tat i didn't read this wrongly.

The MAS which is suppose to regulate and prevent Bad Products also invested in Low Returns High Risk Products?

Gabriel Sim said...

Hi Daniel,

Its unclear if MAS is the 5th stat board.

If it is, then we should be very worried as they are playing with our reserves.