Tuesday, November 18, 2008

Town Council Revelation - let's stop throwing good money after bad

In Parliament yesterday, it was revealed that 8 town councils (TC) run by the People's Action Party have about 16 million invested in troubled structured products; 12 million of which belongs to Holland-Bukit Panjang TC (8 million) whose chairman is incidentally the coordinating chairman for all the 14 PAP TCs.

Naturally, Dr Teo Ho Pin has defended the TCs' investment strategy as being prudent by quoting the often used financial term “diversified”. His strategy may very well be diversified, but an averaged return of 3% per annum in the last six years before the debacle of this mini-bond saga those make you wonder if the investment choices were sound in the first place.

According to Dr Teo, Holland-Bukit Panjang has 8 million is invested in Minibonds and Jubilee notes, which works out to 6.7 per cent of its investible funds. And, it has another $3 million in the potentially-troubling Pinnacle Notes Series 6 arranged by Morgan Stanley.

Therefore, his TC had invested about 9% of its investible portion in structured instruments which are worth close to nothing now.

But wait a minute, while we know how much went into these bad investments, we do not know the total amount invested in what he described as deposits, securities and other financial products.
We do know that the proportion of investible funds are limited to 35%. Since 8 million is 6.7% of this portion, we know that Holland-Bukit Panjang TC alone has about 340 million in sinking funds. Therefore according to the rules, approx 119 million is available to Holland-Bukit Panjang TC for investments.

How much money do the TCs have?

Dr Teo further added that 16 million is 0.8 per cent of all their funds available for investment. Thus, all the TCs combined have 2 billion apportioned for investments. As he limited to the investible portion is 35% of the total sinking fund, TCs have about 5.7 billion! Yes, billion.

But that’s not all. As the sinking fund is distinct from the operating fund for short-term expenses, the amount can only go up. Conservative estimates would probably put the figure between 6 – 7 billion.

Crappy returns

Even if you can get pass this excessive hoarding of public monies for who knows what purpose, don’t you think an Investment strategy that returned an average of 3 per cent a year during an extend bull-run - and even before the fiasco this September involving Lehman-linked products – is simply crap!

Especially when an average 2.9% return on 10-year Singapore Government Securities bonds was scoffed in the hope of earning a measly 0.1% more.

And to rub salt to Division 1/hand-picked /future leaders/A team/PAP-ministars, Hokkien Low’s (Thia Khiang) Hougang TC investment returns averaged 6 per cent a year.

Personally, I question the need for quasi-governmental institution to hoard such large amounts of money. For one thing, they often do not know what to do with them and as a result they turn to “financial experts” whom as far as we know could be their nephews, grassroots leaders and what-not.

Don’t believe such corruption / graft is possible? When there is money on the table, greedy hands are soon to follow.

Two things I would like to see

Firstly, my worry is that as these worthless structured products were once considered conservative and safe options based on guidance from rating agencies. Add in the fact that no one throws all their eggs into a single basket (at least I hope) and a diversified portfolio includes both low and high risk investments, I have to wonder what other products made up the entire portfolio for Holland-Bukit Panjang TC.

If these mini-bond notes were considered low risk at that time, what were the high risk items that were purchased with the remaining investible portion of the sinking fund? I hope the TC will be more transparent about its investment portfolio.

And secondly, I hope that in light of the performance of the MPs involved, their year-end bonuses would be withheld and pumped back into replenishing that was lost due to their poor leadership and oversight. Let's not reward mediocrity with good public money. Afterall, we are already running a budget deficit 3 times more than expected.

Other readings:
No Bonuses for Top Executives at UBS
Goldman execs choose to forgo 2008 bonuses

1 comment:

putra said...

Who sold the structured investment products to the TCs and were there personal interests involved?