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Comfort and City Cab. Two more pies with fingers in them.

The nature of our small metropolis, the costs of private vehicle ownership and other factors such as convenience for elderly and physically challenged users, means that Taxis must be viewed as part of our public transport network.  It is therefore not surprising that most of us have been unhappy at the recent fare hikes and increases in surcharges announced by the largest taxi operator, Comfort and CityCab, which is owned by ComfortDelGro Corporation.    The National Taxi Association (NTA)’s call for the other taxi companies to swiftly follow suit has furthermore appeared, to many, to smack of price-fixing.  There have even been calls for the Competition Commission of Singapore to take action for anti-competitive behaviour.

However this is naive given the industry’s structure. Furthermore it plays into the government’s deliberate lack of transparency when it comes to admitting to the degree of ownership and control it exercises over the Singapore economy.  The problem is the dominance and nature of the government linked entities. This is the elephant in the room and would be activists should complain about this rather than cry “price fixing”,  before they pen letters to the Competition Commission.

Firstly, Comfort and CityCab between them have over 60% of the market for taxis. SMRT, a Temasek-controlled entity, has another 10-15% of the market. While ComfortDelgro is publicly listed with no single majority shareholder, the largest shareholder is the Singapore Labour Foundation, which is the investment arm of NTUC.  Its board and management are a splendid example of the Japanese practice of “amakudai” or “descent from heaven”.  Most of the board are ex-civil servants, former government scholars, or present or ex-MPs who have graduated here after careers with Temasek or one of its stable of companies.  To quote Wikipedia, “The practice is increasingly viewed as corrupt and a drag on unfastening the ties between private sector and state which prevent economic and political reforms.”

With that combined level of market share the taxi market can be viewed as highly concentrated. Economists would call this monopolistic competition. SMRT and ComfortDelGro’s control of the taxi market is reinforced by and reinforces their monopoly of all other forms of public transport in Singapore. I have pointed this out numerous times, most recently on 23rd November in “Another Round of Monopoly Anyone?” (http://sonofadud.com/2011/11/23/another-round-of-monopoly-anyone/). While there may be a high elasticity of substitution between different forms of public transport the elasticity between public transport as a whole and other forms of transport is considerably less.  Commuters would face considerable “sunk costs” in switching to private transport and this is not available to any but the highest income groups. The monopolists are able to maximise profits across public transport as a whole and given that demand will be fairly inelastic have a fair ability to raise prices. The only constraint is the Public Transport Council which in the same way as the NTA is filled with government and company-friendly appointees and thus unlikely to be as tough in defence of consumers’ interests as it should be.

In this environment, it would not make any sense for the marginal operators, i.e. Transcab, Premier, SMART and the remaining Yellow Top taxis, to undercut them. If they do so, they would not gain much extra business and risk the dominant operators reducing their prices to drive them out of business. By setting their prices at the same level as the market leader, the industry as a whole maximises revenue and the revenue is shared out according to market share.  In economic terms SMRT and Comfort and CityCab are price-makers and the others are price-takers. Without doing anything to break up the dominance of the two government-linked entities, it becomes irrelevant whether there is any overt price-fixing agreement or other evidence of collusion. The prices of taxi services will still end up at or close to the level a profit-maximising monopolist would set.

The problem therefore is the dominance of the two government linked entities. The monopoly rents are unlikely to accrue to the drivers who have to deal with a monopsonistic market (a limited number of buyers) for their services. Over time the taxi operators are likely to raise their rents and ensure that much of the revenues from higher fares are clawed back from the drivers who constitute an atomistic group without much bargaining power and a fairly elastic supply of new drivers. The industry body which is supposed to represent their interests, the NTA, cannot be said to be independent of the government or its companies since many are MPs or ex-MPs.

While consumers may complain about the fare increases, the fact remains that Singapore taxis are cheaper than in many other cities in the developed world, where often artificial barriers to entry are created. This will be less true after the latest fare hikes. In addition the system of surcharges, which are increased with the latest measures, is badly designed and only succeeds in creating shortages of cabs before and after the surcharge period and long queues of empty taxis during the peak periods.

I have already called for a far greater degree of competition in other areas of public transport, particularly in the provision of bus services. Where more competition is not possible, there should be stronger and more effective regulation, particularly of non-price areas such as frequency of service. With regard to taxis, the decision to phase out independent operators should be reversed provided they meet minimum safety and quality standards. We need to bring back Yellow Taxis and give them freedom to set their own fares and negotiate with their customers. This might eliminate the current demand-supply mismatch at different periods of the day.

Apart from the obvious high rates of return on investment from leasing taxis, perhaps the government was influenced by its desire to see that Singaporeans keep their noses to the grindstone (MM Lee’s “spur in their sides” philosophy or, “You have been given a precious porcelain rice bowl don’t break it!”). The government has always striven to ensure it captures most sources of economic rent.

The underlying monopoly is undoubtedly a more formidable challenge which can only be addressed at the ballot box but it needs to be addressed.  Any call for a CCS investigation of possible “price-fixing” while the underlying monopoly goes unchallenged, is a charade and merely a self promotion exercise for those involved.

You’ll be dead before you can spend it! Singaporeans enter the 20th year of unnecessary, self -imposed austerity.

Nov 29

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Watching the Euro-zone unravel has so far almost been like a moral fable for Singaporeans.   Be honest! Who out there isn’t feeling a sense of Schadenfreude? The original Greek or Irish problem on the periphery of Europe and investor flight from European sovereign debt has spread via Spain and Portugal, to Italy and even France, Austria, the Netherlands and Finland.

This moral fable could be said to illustrate the dangers of profligate governments who have bought electoral popularity with populist policies and high levels of welfare spending and are now paying the price.  As an economist I would say that the only certain moral to this story is, ‘beware the folly of entering a currency union without a fiscal union’.  The rest is open to debate.

In a desperate attempt to stave off default and unlock emergency funding from the ECB and latterly the IMF, those beleaguered states have agreed to scale back their generous social welfare programmes, increase existing taxes and impose new taxes. All of this results in an externally imposed, endless round of “austerity” budgets. As I write it is not only the financial axe that is being wielded.  The Euro-zone governments are discussing a solution which will essentially involve a loss of political and economic sovereignty by the countries facing insolvency.  This prompted one friend to say that the Germans, by having the most competitive exchange rate when entering the Euro (coupled with a high level of productivity and skilled labour) have achieved a mastery over Europe where Hitler failed.

However, the solution being imposed on the weaker economies would be likely to condemn them to years of lost output and slow growth as compared with higher levels of output and employment in the stronger countries. Without a true political union, which is unlikely to be acceptable to the richer Euro-zone countries such as Germany, it is difficult to see how the currency union can survive longer term.

According to the popular logic of the anti-populists such policies as free health care, free education and old age pensions, lead to a lazy workforce that demands uncompetitive levels of wages.  Thankfully for us our wise government has never fallen for the easy route of giving the people what they want (or need or deserve). On the contrary they have ensured that Singaporeans have been kept on an austerity diet almost since independence.   Pity the struggling European economies but don’t forget to look in your own backyard when you shed a tear.

We have very little welfare spending (except the ‘ give-aways’ at election time when the government throws around money away in an untargeted manner) and one of the lowest expenditures as a proportion of GDP in the developed world on education and health.  Let me repeat that.  One of the lowest public expenditures as a proportion of GDP in the developed world on education and health.   As we know the expenditure in terms of private money coming from your own pocket is very high indeed with exam success being directly correlated to expenditure on tuition. In Singapore we are proud to have developed a world class system of ‘hire ‘education. As well as the private financial burden we have the devastating personal social costs of long term medication and care required for old age, cancer, chronic illness or disabilities both physical and mental.

Despite the government’s harping on how this has resulted in low taxes for median-income Singaporeans compared with Europeans, these income groups are not really any better off. Europeans generally receive free health care and completely free education -which is mostly compulsory up to the age of 16. (a vital child protection safeguard).  Singaporeans have to pay for medical care with Medisave and Medishield and are often forced to top this up or go without treatment because of gaps in coverage or inadequate savings.  We also work up to 50% longer hours to achieve living standards on a par with the less affluent Euro-zone countries.

The end result of this scrimping and saving is familiar to all. The Government has run huge and persistent surpluses as a proportion of GDP(between 5% and10% of GDP though in 2007 it was considerably higher than this) for over twenty years. This includes revenues and receipts from current and past reserves as well as revenues from land sales and capital receipts. I believe it is misleading to exclude these revenues and receipts from the Budget.  The Government further disguises its exceedingly comfortable fiscal position by using an accounting convention of subtracting both current and development expenditure from current revenues. It then adds back only (at most) 50% of the revenues from the Sovereign Wealth Funds, Temasek and GIC.  Our Opposition needs to demand a proper accounting

The high levels of government saving are partly responsible for a current account surplus of over 20% of GDP. Because the MAS intervenes to prevent the Singapore $ rising too far, this is reflected in the growing holdings of official reserves and the overseas assets held by our Sovereign Wealth Funds, Temasek and GIC.  It is true that Singapore has avoided a situation where the Government has had to issue foreign currency debt and in fact has a substantial net asset position (particularly when its ownership of 80% of the land is included!). The benefit is that we have avoided the problems of the Euro-zone where the deficit countries are being forced to cut back on spending and raise taxes.

But is this a good thing and does it make our government fiscally wise? In a way that is like saying that a starving man has avoided having a starvation diet imposed on him by voluntarily deciding to impose it on himself first.   Some of you will be acutely aware that those holding the food supplies make sure they themselves have a very rich diet. The wonder is that whilst they earn  millions of dollars for cabinet roles you agree to tighten your belts, take on extra work, move dad into the corridor, rent out your rooms and die slowly without the dignity of care and medication.  If you are still feeling smug bear this in mind. Even with cutbacks the countries embracing austerity programmes will still have almost free public health and education while Singaporeans do not.

There is really no justification for the continual accumulation of reserves and government surpluses once these have reached a level sufficient to provide for a serious crisis. Our Government passed this level some years back but continues to insist on its necessity. Meanwhile CPF holders are being forced to take unilateral changes in the terms on which they can get their money back. This is despite the low returns on  CPF savings having been one of the major contributors to the growth in overseas assets. The present generation of Singaporeans has been robbed, supposedly to pay for a future generation of Singaporeans, despite accelerating technological change and productivity growth making all but certain that future generations will be much richer than the present one.

The big question is will we even benefit from our enormous overseas assets? I believe we are fooling ourselves if we think that by actually saving all this money we will get to spend it or that our children will.  GIC, Temasek and MAS have yet to come clean on how much it has invested in Euro-zone sovereign debt and how much it stands to lose should there be a debt default in the worst case or just a restructuring.  As I said before, there is no-one in Parliament willing or able to demand an account.

Presently the countries that have run large current account deficits for many years, such as the US and many members of the Euro-zone, are acutely aware that the counterpart of their deficits is excessive saving in the surplus countries, mainly China but also Japan, Korea, Germany and of course Singapore. They know this prevents them from being able to achieve satisfactory levels of growth, output and employment. The Euro-zone has already turned to China and asked the Chinese Government to buy more Euro-zone debt. This has allegedly infuriated many ordinary Chinese who complain about how poor they are compared with the average European. Their anger should be directed at their government which has held down consumption and domestic living standards to create a level of reserves far higher than necessary. This has allowed a situation in which they now find themselves held hostage to the debtor nations. It is likely that our Government faces the same pressures from the EU to invest in bailing out the insolvent members of the Euro-zone.

It would be far better if our reserves were spent on benefiting Singaporeans in the first place rather than hijacked by political considerations.  That is why I have consistently called for a reduction in our general budget surplus, measured as widely as possible, to a much lower figure, say under 1% of GDP over the course of an economic cycle. The funds could be invested in basic improvements to Singaporeans’ health and education as well as cutting taxes.

I have also called for the privatization of Temasek and GIC with the distribution of shares to Singaporeans. If they are owned directly by the people then it will be more difficult for them to be held hostage to foreign political pressures.

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What Lessons does the Olympus Saga hold for Singapore and our SWFs?

Nov 3

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Olympus has been much in the news recently. Originally a camera company, these days much of its business comes from medical technology such as endoscopes and microscopes.  It also gained the distinction of being one of the few Japanese companies, including Sony and Nissan to appoint a foreign CEO. Namely, Michael Woodford, a Briton.

On October 14th Olympus sacked Mr. Woodford after he raised questions about what he saw as unjustifiably large payments totaling US$1.3 billion in relation to certain corporate transactions. Olympus blamed the sacking on major differences between Michael C. Woodford and the rest of the management team.

As soon as I read the news I couldn’t help thinking of Charles ‘Chip’ Goodyear. The sentiments expressed in the official statements sounded so similar.  Then again I am always wary of monoliths, whether non-democratic governments or multi-national companies, which wheel out Culture as an excuse for carrying on doing what they do without accountability.

Indeed Olympus issued a statement which in addition to the major differences cited  goes on to say that the company will establish a Japanese style management in which “all our employees will head for the same direction” (sic). Here in Singapore they like the phrase ‘Asian values’ and in fact Temasek Holdings and PAP government statements can sound very similar to the Olympus board when they call for “cohesion” and “constructive” politics.  Simply asking awkward questions and refusing to keep quiet is out of step with Japanese style management values/Asian values.

What were the details of the transactions about which Woodford sought answers? In 2008 Olympus acquired Gyrus Group, a British company, for over US$2 billion. In connection with this transaction it ended up paying US$687 million to a pair of obscure corporate advisory firms headed by two Japanese bankers.  This payment represented nearly one-third of the value of the acquisition. Usually the fees in this type of transaction are around 1% of the value of an acquisition. Once they had got the money, the two bankers behind the advisory firms wound them up. They have since refused to comment.  After the news broke, the FBI have also announced that they are conducting an investigation to see if any US laws were broken.

Olympus also paid US$773 million in 2008 to acquire three small loss-making firms in businesses unrelated to its own. In making the acquisitions it was advised by a company called Global Company which owned stakes in the three companies.  The relationship with Global Company was overseen by Mr. Kikukawa, the company chairman. This is the same Kikukawa who dismissed Woodford. After buying the companies, Olympus within a year wrote off two-thirds of the acquisition cost.

After Mr. Woodford’s sacking and the subsequent revelations about questionable payments, Olympus’s share price collapsed, falling by 50%.  In typical Japanese fashion Mr. Kikukawa was forced to commit the metaphorical seppuku and resign.  In Japan this falling on the sword is usually seen as the end of the matter and business goes on as usual with a new name at the helm.  In fact the company has promised a third-party inquiry but this clashes with statements by the new Chairman who is still insisting that there were no improprieties.

Today there were more revelations. Robert Mundell, a Nobel Prize-winning economist and the only foreign director on Olympus’s board when these transactions took place, made three trips to Japan prior to joining the board which were paid for by Axes Japan, a company owned by the same people who owned the advisory firm, Axes America, that was paid the outsize fee. However it is not known whether Mundell attended any of the meetings which approved the transactions or whether he recused himself.

In Olympus’s case the company has been punished by the markets for what appear to have been shareholder-value destroying transactions. Previously bullish analysts have swiftly revised their ratings and the company will be forced to pay lip service to the values of transparency and accountability by commissioning a third party inquiry. However much management might wish to escape scrutiny of their activities by appealing to strictly Japanese values this is impossible when their company is listed on the first section of the Tokyo Stock Exchange and has or had a significant international shareholding. The scandal has prompted even the Japanese PM to weigh in. This is highly unusual for a Japanese leader but he feels the controversy will harm his country’s image.

To quote his words, “it will be a problem if people take the events at this one Japanese company and generalize from that to say that Japan is a country that does not follow the rules of capitalism.” He is worried about the damage this could do to Japan’s reputation as a place to invest.

As I said above, the Olympus affair would appear to have uncanny parallels with the resignation of Chip Goodyear as CEO-designate of Temasek,  a few months after being appointed. In this case there was no public sacking. Instead the resignation was supposedly by mutual agreement citing “unresolved strategic differences”.   The lack of explanation failed to satisfy Singaporeans. It is notable that when pressed in Parliament to elaborate on the reasons for the resignation Finance Minister Tharman said that it would not be in the public interest to do so.

If Temasek had been a publicly listed company, then the lack of disclosure might have been a strong signal to investors that perhaps corporate governance was not all it should be and that they should head for the exit. After all asymmetric information between corporate “insiders” and “outsiders” is a key reason why there is a share price discount for poor corporate governance.

However Temasek (and GIC) are not publicly listed. Thus Singaporeans are locked in to their “investment”, with no ability to sell and get their money out. They cannot sack the management if it is deemed to have performed poorly. And they can’t even ask for a third Party enquiry.  That is why I have consistently advocated the privatization and listing of Temasek and GIC and the distribution of shares to Singaporeans so that we become actual stake-holders rather than fantasy ones.

Too often the words “Asian values” are used in a self-serving manner designed to prevent questioning and accountability.  The British president of Olympus was sacked for being” un-Japanese”.  But they knew he was not Japanese when they appointed him.   They seemed taken aback that he was demanding answers to questions that the company’s board did not want asked. In truth his sacking had little to do with being Japanese or not. They just did not want the extent of their destruction of shareholder value exposed.

In Singapore unfortunately our government and most of our Parliamentary Opposition seem to have the same mindset.  Sadly our Opposition, with one or two exceptions, has so far been prepared to play the same role as the tame external directors on Olympus’s board and not hold the government to account. What we need in Parliament is more Mr. Woodfords and less Mr. Kikukawas.

Our government is always keen to slavishly import ideas and so-called expertise from Britain and other democratic countries when it suits them.  The state controlled media are quick to report slavish adulation of our government by foreigners that were it critical would be swiftly condemned as interfering in domestic politics. We should not be gulled into thinking that the right to ask questions and demand accountability and transparency are a Western import we should do without.  Just as shareholders have the right to demand accountability from the managers of the companies they own, so we as citizens have the right and indeed the duty to subject government policies to scrutiny and hold ministers accountable. Indeed it is key to our ability to be taken seriously as a First World nation.

Posted in The market

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GIC, UBS and the Death Spiral of your CPF funds

Sep 23

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Kweku Adoboli the alleged rogue trader at UBS and Nick Leeson, the infamous rogue trader who brought down Barings, both have a strong Singaporean connection. Nick Leeson worked in Singapore while Kweku Adoboli worked for the bank whose largest shareholder is the Singapore government.

Singapore, through GIC, became the largest effective shareholder in UBS when it purchased a 9% stake of mandatory convertible notes in December 2007.  The Singaporean government was responding to a call by UBS at the time for a bailout following the subprime crisis.  In fact our generous bailout caused UBS which stood for Union Bank of Switzerland, to be given the nickname, “The United Bank of Singapore “in its home country

Kweku Adoboli appears to have lost the Swiss bank an estimated minimum of $2.3 billion. But his losses only represent a fraction of the total losses that GIC has made in UBS so far.  UBS was trading at 50 Euros per share at the end of 2007 and just before the latest debacle it was trading around 11 Euros.  It had therefore already lost around 80% of its value before he added a further 2% loss to its 2007 market valuation. For GIC it appears this 80% loss probably amounts to S$7-8 billion assuming that the currency purchase was unhedged at the time. That may not seem like a huge amount in the context of GIC’s rumored total assets but we don’t know what percentage it represents of GIC’s equity. As the bonds issued to CPF by GIC have to be repaid it’s conceivable that GIC could end up with negative equity.

Anyway as the largest stakeholder in UBS any loss chalked up to them is going to send shock waves through GIC.  And as GIC’s assets are funded through borrowing in Singapore dollars from the CPF, your savings are directly linked to UBS’ fortunes. Furthermore this latest loss comes amid the start of a double dip recession. The rerun of the 2008 financial crisis looks potentially much more worrying this time around because governments appear to have given up on taking steps to offset it and can only repeat the mantra of fiscal austerity. With the latest announcement from the Fed ruling out a new round of quantitative easing, central bankers also appear to have given up on monetary policy.

The UBS losses have even provoked GRC into making a rare public statement resulting in a front page headline in the Financial Times on September 20th.

 “Singapore fund hits at UBS ‘lapses’. “   

The FT article went on to further quote from GIC’s statement,

“[We] discussed the alleged fraudulent trading that led to the large financial loss for UBS. GIC expressed disappointment and concern at the lapses and urged UBS to take firm action to restore confidence in the bank”.

Fine words indeed but is it not a case of locking the stable door after the horse has bolted? Yes, GIC is now belatedly hitting out at UBS for its lack of controls and lapses but are they just creating a storm in a tea cup to cover up a disastrous investment decision? If GIC is angry with UBS then Singapore citizens should be furious with GIC. As CPF members we the Singaporean citizens should be demanding some answers and explanations from our government.

GIC’s attempt to avoid transparency over its decision to invest in UBS by pinning the losses on a rogue trader, an external event outside of their control, won’t pass muster anyway. In fact there were plenty of warning signs in the public arena that something was seriously amiss at UBS, long before Mr. Kweku Adoboli was uncovered.

In 2008/9 UBS was embroiled in a tax evasion scandal in the United States.  The misconduct was so severe that UBS was faced with the loss of their banking license in the US. There are few sanctions harsher than that. The scandal centered on UBS’s wealth management division where employees had been helping US customers to evade taxes. One UBS whistleblower employee even testified to practices such as smuggling diamonds in empty toothpaste tubes! UBS finally kept their license by settling out of court and agreeing to pay US$780 million to the US government in April 2009.

Not long after this in November 2009 the UK’s Financial Services weighed in against UBS.  The Authority fined UBS £8 million citing their “inadequate systems and controls” over 6 employees in the wealth management division who had been making unauthorized trades using customers’ money.  UBS was also forced to pay out US$42 million to compensate its customers for the losses.

Now in 2011 we are told that GIC expresses “disappointment and concern at lapses”. Seriously guys, where have you been?  As a minority stakeholder in a country that represses dissenting views I can do nothing more active than express disappointment.  But in 2007 and again in 2010 GIC was the largest single shareholder in UBS and as the largest shareholder they had considerable clout.  So the question should be why did GIC make no public effort to improve performance or risk controls over the last 4 years?  Why did GIC not go public with their concerns before now as an activist hedge fund or asset manager would have done?

It may be that as a public entity they were sensitive to charges of political interference and the kind of backlash they saw when they bought Shin Corp in Thailand. If this is the case it simply strengthens the argument against having a sovereign wealth fund in the first place.

The real question is what were GIC doing investing in a deal whose implicit risk they appear not to have understood and via an instrument they shouldn’t have touched with a barge pole? Certainly if reports on Bloomberg are true then they made the decision to invest with unnecessary haste and little due diligence.

Mandatory convertible bonds are instruments which have to be converted into shares of the underlying equity on maturity. They are aptly known as “death spiral” bonds in the investment industry.  This is because they represent an inevitable large dilution of the outstanding equity of the company issuing the bonds.  The coupon may seem juicy but it stems from the fact that the investor has sold a put on the shares to the issuer. If the option was stripped out and sold separately it would undoubtedly look cheap at the price GIC sold it, particularly as UBS had inside information about the true state of the bank.

Ironically UBS knows about the risks of death spiral” bonds. They themselves lost a lot of money in 1997 from buying mandatory convertible bonds issued by Japanese banks. In this case the banks’ equity prices promptly traded down towards the mandatory conversion price, set roughly 50% below where the equity was trading prior to the issue. Had UBS learnt something from that experience?  As far as I’m aware they only started to issue their own death spiral bonds after their fingers were burnt by the Japanese.

The only other major stakeholder in the UBS bonds at that time was an unnamed Middle Eastern investor in Abu Dhabi who bought a $2 billion stake. But then he probably had money to burn, literally, as he would be investing oil derived revenue and not the savings of his hard working citizens.

In any event the bail out by GIC didn’t change UBS’ fortunes. The losses were so severe that by 2008 they looked set to go bust until this time the Swiss government stepped in with an emergency rights issue in October of that year. Had they not done so GIC would have lost all their money. In 2009 the Swiss government sold its own stake, at a healthy profit I might add. Yes, the Swiss government was prudent enough to get out at the height of the market but GIC held on! I fear that MM Lee thinks he is Warren Buffet who famously holds positions for 30 years.

We can only speculate as to why MM Lee felt that we needed to use our pensions to bail out a foreign bank especially at a time when the industry was already reeling from the subprime crisis. At the time, as Chairman of GIC, he was quoted in a Bloomberg interview in April 2008 saying

“The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again. Will there be another Swiss bank like UBS for wealth management? I doubt it, we doubt it, that is why we invested in it.”

Clearly the salesmen’s patter got the better of the Chairman of GIC, Mr. Lee Kuan Yew, and of the investment committee at GIC when they took the decision to invest in December 2007. Or the GIC decision makers were so blinded by the thought of the enormous returns they were going to make that they were unable to look at the downside risks.

But GIC did have the benefit of hindsight and experience when they made their statement on  September 20th which continues with a chilling echo of MM Lees naïve views of 2008,  “GIC’s view of UBS’s fundamental strength as a well capitalized bank with a strong private wealth management franchise remains unchanged,”

 When GIC talks about a strong wealth management franchise they are singling UBS out as a brand consistently capable of making money through wealth management. I agree that smuggling diamonds out in toothpaste tubes is a strong way to generate wealth for your clients and if it weren’t illegal, I too would love a piece of that franchise.

It would be an interesting academic exercise to see what lessons both Temasek and GIC have learnt from the previous crisis, if the consequences were not so serious for Singaporeans. Judging by GIC’s statement above we must presume they have learnt very little.

The UBS debacle is an illustration of how the concentration of the power to make such large investment decisions in the hands of a few individuals is so dangerous. Particularly as there appears to be no accountability for those investment decisions later as there would be if Temasek or GIC were in the private sector. Let’s not forget that it is our money the managers are playing with. If this were a hedge fund or conventional asset manager that had performed poorly, then we, the ultimate owners of these assets, could take them away and give them to another manager. Unfortunately we do not have that option.

Tony Tan our (35%) elected President was deputy Chairman of GIC at that time so clearly there is a potential conflict of interest here and we should expect no efforts at improving transparency or oversight from that quarter. This is the reason why I have called for Temasek and GIC to be privatized and listed so that we can gain some much needed transparency and can become the majority shareholders in our own assets.

So to answer MM Lee’s questions, “Will there be another bank like UBS for wealth management?” Will there never be employees making unauthorized trades with clients’ money?  Will there never be another rogue trader? I doubt it, we doubt it, that is why Singaporeans need greater control over their investments.

Posted in Budget

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