Was GIC also involved in the US hedge fund collapse? Should someone take responsibility?

STRAITS TIMES  OCT 3 1998

                   ZURICH -- UBS AG, the world's second-largest bank, said
chairman Mathis Cabiallavetta and three top executives resigned,
taking the blame for a 950 million Swiss francs (S$1.16 billion)
charge stemming from its investment in Long-Term Capital Management LP,
the failed US hedge fund. 

BUSINESS TIMES   3 Oct 1998 
Fund managers drew attention to an article in Institutional Investor, written
in November 1996 when the Greenwich, Connecticut-based LTCM was a rising star
in the hedge fund world. 

The article mentioned the possible involvement of several Asian government and
semi-government institutions. 

"LTCM has in fact methodically nurtured its relationship with Wall Street
firms. But its real edge comes through its strategic partners, which can fill
that gap in local market expertise and help to supply or arrange the all-
important repo financing and other credit lines. 

"There has been persistent rumours that several central banks and quasi state
banks -- Taiwan's central bank, the Hongkong Land and Development Authority
and the Government of Singapore Investment Corp (GIC) -- are LTCM's strategic
partners," the article said then. 

"These partners, all of whom placed at least US$100 million with the firm, are
supposed to be able to gain access to LTCM's technology, modelling, analytics
and perhaps some of its market thinking, as well as collect those returns.
LTCM, in return, gets capital, and a lot more," it added. 

When contacted this week, a GIC spokesman declined to comment. 

While unnerving, fund managers said they would not be too surprised if the
unfolding LTCM saga reveals further central bank or quasi-government
involvement. 

==================================

Editor [28 Dec]:
I have been asking around about this and it seems that in this case, GIC did not 
invest in LTCM. Apparently, the rationale for declining comment is that they felt 
they should not come out to make a statement every time there is a banking or 
financial crisis somewhere in the world. I can see how an over-zealous denial 
whenever there is doubt will make them look worse than if they had just stayed silent. 
However, since GIC is investing public funds, the question remains on why should 
they be so secretive with their financial activities and thus remain not accountable to 
the electorate. Following the government's constant analogy of Singapore Inc, 
shouldn't the share holders be given an annual financial report?

Here is another news cutting from the Business Times

From The Singapore BT
December 22, 1998 

A little more disclosure from Temasek would go a long way
By Conrad Raj 

TEMASEK Holdings, the investment arm of the Singapore  
government, duly reported recently that its holdings in several listed
companies had gone up. 

That should excite the stock market, and it did. If the Singapore
government was buying, it would suggest that it thought the stocks
were undervalued or had taken a leaf from the book of the Hongkong
authorities and intervened to prop up the market. 

It was nothing of the sort, as it soon transpired. Temasek had simply
taken over those stocks from POSBank. The stocks were among the assets
of POSBank retained by the government when the savings bank was merged
with DBS Bank. 

Clarification needed: Looking back, it could be asked if Temasek
should have made this clear rather than just satisfy disclosure
requirements by reporting to the Stock Exchange of Singapore that its
holdings in those stocks had gone up. 

In this age of electronics, information spreads widely and quickly.
Anything short of clarity could create a false market, as it seemed to
have done in this case. 

A wire agency spotted the notice of transfer filed by Temasek and
reported that the Singapore government had intervened in the stock
market. It said Temasek had bought $76 million worth of shares in 11
companies, including government-linked Singapore Airlines, Singapore
Technologies Engineering, SembCorp Industries, DBS Land, Keppel Bank
and Keppel Corporation. That report was picked up by a Hongkong
newspaper. It remained for Temasek to clear the air, which it did. 

It explained that it had taken over those shares "to enable DBS to
comply with Section 31 of the Banking Act which requires that the
investments of a bank should not exceed 40 per cent of its capital
funds". 

But it had taken Temasek all day to come up with that explanation. BT
received a fax from Temasek around six that evening, an hour after
trading at the local stock market had closed. 

Many investors could have been misinformed. In fact, many analysts
attributed the day's bullishness to Temasek's "intervention". Who
could blame them in the absence of a timely clarification from
Temasek? 

It was only a few days later that Temasek did better at forestalling
any possible misinterpretation in the market by carrying a footnote in
the notices it filed with the SES. 

While Temasek, which has shareholders' funds of over $34 billion, may
not intervene in the market to influence prices, it does have a team
trading in all forms of securities. 

So how is an ordinary investor to know the exact nature of a
transaction from the SES filings, unless he is specifically told.
Temasek, like most Singapore companies, may declare its transactions
according to the standard stock exchange rules, but surely it does not
take too much effort to give a little more when it is clearlyrelevant.


Interestingly, this incident could have happened much earlier in
August. Then two large blocks of DBS Foreign shares valued at $315.14
million changed hands in married deals. Nary a word came from Temasek
but somehow the speculation was that it was a housekeeping exercise by
POSBank ahead of its takeover by DBS Bank. 

What it goes to show is that one can't really anticipate how
information would be interpreted in the marketplace. 

General reluctance: Still, various parties have complained about the
general reluctance of Singapore companies to provide more than the
minimum disclosure. For instance, a survey by the Political and
Economic Risk Consultancy found that "the standard practice is for
minimum disclosure that satisfies the letter of the law, sometimes to
the extent of ignoring the underlying principle". 

Even Second Finance Minister Lim Hng Kiang, whose ministry oversees
Temasek, has joined in the call for more information. Mr Lim said
recently that companies need not fear that greater disclosure will
result in a loss of competitive advantage as the reverse might be
true. 

The latest episode involving Temasek, though an unlisted entity, shows
that as far as corporate disclosure is concerned, Singapore still has
a long way to go. 

====================================

Justin Chee:

I would like to put up two questions.
the first being; how much and to what proportion of our govt's reserves
are placed in privately managed custodial services?
the second being, what are our governments financial objectives? are
they in the market to play? or are they in the market to hedge and to
protect our citizens hard earn monies? someone in the government has to
know that with opportunties to profit, there are usually equal or
greater opportunties to lose... especially in a market that moves
sideways and with thin volumns.  


Financial Times (London) 
October 3, 1998, Saturday LONDON EDITION 1 


HEADLINE: Curiouser and curiouser: 
Philip Coggan considers the significance of the financial 
markets' wild swings and ponders what might happen next: 

BODY: 
   The dollar was strong; the dollar is now weak. Stock markets were at
all-time highs; now they are in headlong retreat. Emerging markets
offered long-term rapid growth; now they are
mired in recession. Long bonds were a safe haven; now even they lack a
sufficient comfort factor. 

Financial markets seem to have entered a looking-glass world in which
all the assumptions of recent years have been turned upside-down.
"Contrariwise," continued Tweedledee, "if it
was so, it might be; and if it were so, it would be; but as it isn't, it
ain't. That's logic." 

Can things really be so odd or are investors merely suffering from what
might be called "irrational exhaustion"? The wild swings that have
affected currencies, equities and bonds in
recent trading certainly show that something is seriously out of kilter
in the financial system. 

The traditional devices for assessing market movements have had to be
thrown out of the window. No commentator could have predicted the
collapse of the dollar against the yen on the
basis of the relative strengths of the US and Japanese economies,
financial systems or their interest rate structures. "If you claim to
understand exactly what is going on at the moment,
then you probably don't know what you are talking about," quipped one
analyst yesterday. 

It is standard financial theory to assume that the markets are priced in
line with economic or corporate fundamentals. That certainly is a good
rule of thumb for the long term. 

But in the short term, a more important factor comes into play:
liquidity. A share, bond or currency is worth what someone is willing to
pay for it. When the balance of buyers and sellers
is upset, that can lead to very sharp movements in prices, like the
bargain offers shoppers find at the January sales. 

Hedge funds are all too often the "usual suspects" after an unexpected
market movement. Analysts seem convinced that some of the last week's
most dramatic price shifts - notably the
decline in the dollar from Y136 on Monday to Y111 at one point on
Thursday - were the result of the more speculative funds reducing their
positions. 

Being short the yen (gambling that the Japanese currency will fall) and
long the dollar, particularly dollar bonds, has been a very profitable
play recently. Interest rates worked in your
favour since you were borrowing from the Japanese at less than 1 per
cent and lending to the US government at more than 5 per cent. The
strength of the dollar gave you a currency
bonus. 

How exactly this strategy came unstuck is not clear. In the wake of the
near-collapse of Long-Term Credit Management, a US hedge fund, lenders
around the world have reduced credit
facilities to all hedge funds, forcing them to cut their positions in
all markets. Or it may be that the dollar had already slipped enough
from its previous high of Y147 that funds were
panicked into cutting their losses. That meant selling bonds - the long
part of the trade - as well as buying back the yen. 

What is apparent is that another "looking-glass" element of the recent
turmoil has been a change in attitude towards risk and those taking
risks. For years, share prices were rising (in
Europe and the US at least), bond yields were falling and credit was
plentiful; one did not have to be a genius to make money in developed
financial markets. 

But the emerging market crisis that began when Thailand devalued the
baht last year has steadily increased investors' risk aversion. One by
one, the safe havens have disappeared, rather
as hunters stop up fox-holes to prevent their prey's escape. 

It was assumed that European equities would be an oasis of calm amid the
turmoil of emerging markets; but the DAX index in Frankfurt is more than
35 per cent below its July peak.
Enthusiasts claimed high-tech stocks offered the kind of long-term
growth that made them immune to the vagaries of the economic cycle; the
Nasdaq index, which is weighted in
technology stocks, is down nearly 30 per cent. 

With the US dollar and long-dated Treasury bonds also losing some of
their attractions in recent days, investors are fast running out of
cubbyholes. Even the most conservative
investment no longer seems reliable. "In the current environment it
takes a brave man to take money out of his pocket and put it into the
gilt market [for UK govern ment debt]," said
Steve Scott, an analyst at Dresdner Kleinwort Benson yesterday. 

In the end, when investors get into a funk, there is only one sure place
for their money - cash - and the "dash for cash" is often a sign of the
final throes of a bear market. 

It certainly seems as if the process has speeded up. Traditional bear
markets were long drawn-out affairs in which activity slowed to a
standstill. Each rise in prices was merely a "suckers'
rally" which allowed the smart money to get out, and investors
eventually gave up in despair. 

The average bear market since the second world war has lasted 14 months. 

It may be that the advent of the hedge funds has accelerated the cycle.
Investors have been speculating with borrowed money all the way back to
the South Sea Bubble. But the scale
and scope of the operation has changed. "The emergence of such large
speculative investors operating with high levels of leverage on a global
basis has no parallel in modern financial
history," says David Hale, chief economist at the Zurich group.
Leveraged investors have to sell, and sell quickly, when prices move
against them. 

At the same time, the development over the last 20 years of financial
futures exchanges and over-the-counter derivatives has made markets more
efficient. Liquidity has improved and that
has made it easier for shifts in investor mood to be translated quickly
into prices. 

"Here you see, it takes all the running you can do to keep in the same
place" said the Queen. "If you want to get somewhere else, you must run
at least twice as fast as that." 

This could be good news for investors. After the stock market crash of
October 1987, the worst was just about over by the end of the year. This
time round the US Federal Reserve and
the Bank of England have already cut interest rates and more reductions
may be on the way; the International Monetary Fund and the Group of
Seven leading industrial nations appear to
be willing to make another attempt to draw a line in the emerging
markets crisis and stop it engulfing Brazil. 

But before markets can calm down, a few significant worries need to be
sorted out: 

* The Japanese financial system. The Japanese government has been edging
towards a plan for the rescue of its banking system. But most observers
doubt official figures on the size of
bank bad loans and the recent falls in the Tokyo stock market will not
have helped the sector, which counts unrealised share price gains as
part of its capital. 

"We expect a number of banks will report they are insolvent if forced to
mark their 'hidden assets' to market values at the September 30 levels
of the Nikkei," says Carl Weinberg of High
Frequency Economics. 

* The hidden horrors. Traders are fond of the "cockroach theory" which
states that you never find just one cockroach in a kitchen. Similarly,
no-one believes that Long-Term Capital
Management will be the only institution to have been savaged by the
recent market movements. There were rumours that the Tiger hedge fund
was behind a substantial part of the
dollar/yen move this week but, even if it successfully liquidated its
position, what about other investors who had bet on the dollar?
Regulators are likely to be particularly concerned
about the trading arms of the big banks. 

* The economic fallout from currency movements. A weaker dollar and
stronger yen will help some of the Asian countries that are competing
against Japan and have dollar-denominated
debts; it should take the pressure off the Hong Kong and Chinese
authorities to devalue. 

But the yen's rise will not help Japan's exporters at a time when that
sector is the country's sole bright economic spot. And it is very bad
news for the European corporate sector, which
has been basking in a strong dollar for three years. 

Tackling imbalances in foreign exchange markets is like sitting on a
balloon; no sooner have you successfully squashed one part of the
problem than it bulges somewhere else. Everyone
cannot devalue their currencies at once; some countries are going to see
a severe deterioration in their trade positions. 

These problems may seem overwhelming but that is the nature of bear
markets. For stock markets in particular, a lot of bad news has already
been priced in. In time, investors will adjust
to this new unfamiliar world and as leveraged funds retreat from the
market and interest rate cuts relieve some of the liquidity pressure,
volatility will diminish. As Lewis Carroll's Queen
said: "Sometimes I've believed as many as six impossible things before
breakfast."