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Temasek to boost stake in Merrill Lynch

Singapore’s powerful state-linked investment firm Temasek Holdings, the largest shareholder in troubled US investment bank Merrill Lynch, will spend $3.4 billion to increase its stake.

Merrill Lynch announced overnight it was dumping billions of US dollars of mortgage debt at a steep loss and raising $8.5 billion in new capital, including the $3.4 billion from Temasek. In a brief statement, Temasek said it “confirms its commitment of $3.4 billion in the public offering by Merrill Lynch, a portion of which is subject to regulatory approval”. The Wall Street firm’s finances have been ravaged by a US housing slump and the sub-prime mortgage crisis.

The latest announcement came in the wake of Merrill’s July 17 report that it had racked up a net loss of $4.89 billion for the second quarter, another sign of the devastation of the US real estate crash on financial markets. The tarnished Wall Street star said it was selling off a large amount of asset-backed collateralized debt obligations (CDO) - the packaged US mortgage securities which have ravaged bank balance sheets around the world. The move took $11.1 billion off of its books, but only after scoring a huge loss on the sale.

Merrill said the CDOs had a face value of $30.6 billion and were sold to Lone Star Funds, a specialist in distressed assets, for just $6.7 billion. “The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,” Merrill chairman and CEO John Thain said in a statement. Thain said the CDO sale and the capital hike will “materially enhance the company’s capital position and financial flexibility going forward”. The company said it expects to record a pre-tax write-down in the Q3 of about $5.7 billion, which includes a $4.4 billion loss on the CDOs being sold.

Temasek had already committed in December to injecting $4.4 billion into Merrill Lynch, which it could increase by another $600 million. That initial investment came with a requirement that if Merrill raised more capital within 12 months at a price lower that the $48 per share that the Singapore fund paid, it would be compensated for the difference. Temasek said its new commitment “includes a sum of $2.5 billion arising from a reset payment which Merrill Lynch has agreed to pay to Temasek as an adjustment to the price of Temasek’s original investment made in December 2007”.

The Singapore firm is putting that $2.5 billion back into Merrill, along with another $US900 million. When contacted by AFP, Temasek spokesmen declined to say why the firm decided to increase its stake. Merrill Lynch described Temasek as its largest shareholder, but a Temasek spokesman would not say what percentage of Merrill Lynch shares it will hold on completion of the latest deal.

Temasek’s latest investment is the most recent multi-billion dollar stake Singapore funds have taken in global financial houses battered by the sub-prime crisis. Temasek and the Government of Singapore Investment Corporation (GIC) are both sovereign wealth funds. Such funds are a form of government-created investment vehicle and have emerged as a potent force on global financial markets, but have also stirred controversy. Temasek controls some of Asia’s best-known companies, including Singapore Airlines, Singapore Telecommunications and Neptune Orient Lines. GIC has bought multi-billion dollar stakes in two other financial institutions battered by the housing crisis, the Swiss-based UBS bank and US banking giant Citigroup.

Temasek has said its net portfolio worth is more than $100 billion while GIC said it manages “well above” $100 billion. Analysts say the GIC figure could be as much as $300 billion or more. Those figures place Temasek and GIC among the largest sovereign wealth funds in the world, according to an October report by Citigroup Global Markets. Such funds are a form of government-created investment vehicle that have emerged as a potent force in global markets, leading to concerns over a lack of transparency and national security in recipient countries. (WA Today, Australia)