Sunday, May 17, 2009

Temasek and Bank of America - Are we missing something?

Published first at

In December 2007 – the nascent and uncertain times prior to the eventual global credit meltdown – Temasek Holdings placed a strategic US$4.4 billion bet on troubled US investment bank Merrill Lynch. As markets continued to unravel from the subprime crisis and credit squeeze Temasek nearly doubled down with an increased stake of US$ 3.4 billion in July 2008.

In justification of this tremendous capital injection in uncertain times, and perhaps to calm nervy Singaporeans, Temasek declared “great confidence” in then Merrill Lynch CEO John Thain.

MP Lim Hwee Hua – Singapore's minister of state for finance – announced in parliament that “Because our reserves are invested with a long-term horizon, this long-term orientation will keep us from selling in panic in a market downturn” and that “The downturns also offer opportunities for our agencies to invest in good quality assets at prices that are attractive from a long-term perspective.”

History is cruel and unforgiving as less than a month later, Lehman Brothers went bust; setting off a chain of events threatening to take down giant insurers, banks, motor companies, … etc down with it.

Having already suffered heavy loses on initial investments, optimism sprung eternal when Bank of America bought over Merril Lynch to prevent it from going bankrupt.
The conversion of Merril into Bank of America shares promise some long term recovery given that Bank of America is a much bigger franchise.

Had Temasek sold its stake after the Bank of America takeover in Sep 2008, it could have gained US$1.5 billion, according to an estimate by Ilian Mihov, an economics professor at graduate business school INSEAD in Singapore. The stock price of Bank of America ranged from US$26 – US$37 per share in Sep 2008.

Perhaps Temasek believed in its mantra of having a long term investment horizon and sought to retain the Bank of America stock to earn more than what to them was a measly potential 20% return on investment.

That resolve, or foolishness, was short lived and today it was confirmed that Temasek had sold its entire stake by 31 Mar 09. Choosing instead to increase investments in emerging markets and reduce exposure to developed economies.

Market timing is clearly not a strong suit of Madam Ho Ching. Since the end of March, when Temasek completed the sale (at an average price of US$6.73), Bank of America stock has risen 66 percent (presently it is US$11.31).

US$11.31 is not much compared to the US$37 it could have made in Sep, but its obviously much better than US$6.73.

I’m not an economist but I am well aware of the shortcomings of attempting to time markets. It is often described as a fool’s quest and I therefore can appreciate the long term investing philosophy. So why the sudden abandonment of this philosophy? We will probably never know the real reason.

Meanwhile, we continue to reward incompetence over and over, AND over again.

Am I missing something?

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