JUST weeks before global financial markets were first sucked into a vortex last August, Dr Tony Tan (picture) was sounding alarm bells about “dark clouds”, which had already prompted the Government of Singapore Investment Corp (GIC) to cash out of some of its multi-billion-dollar investments.
Yesterday, GIC’s deputy chairman was back with an even more harrowing prediction. “We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years,” he said.
Dr Tan delivered this warning during his opening speech at the fund’s inaugural staff conference yesterday, the only part of the one-day programme open to the media.
GIC, which manages over US$100 billion ($135 billion) of Singapore’s foreign reserves, has spared itself some of the pain.
In the third quarter last year, it sold some of its equities before financial markets nose-dived. This helped provide the funds for GIC to pump a total of about
US$16 billion into sub-prime-hit Citigroup and UBS over January and December, in exchange for bonds convertible into shares.
Since then, Citi and UBS have unveiled more losses and writedowns, causing their share prices to fall about 7 per cent and 38 per cent respectively.
But Dr Tan said yesterday that GIC believes the two “longterm” investments will bring “good returns when markets stabilise and economic conditions return to more normal levels”. Until then, however, these one to two years will be “extremely nervous and volatile”.
He revealed yesterday that GIC had set up three group committees to oversee risks, organisational issues and investments.
The group risk committee, which will be chaired by chief risk officer Sung Cheng Chih, provides oversight and guidance for the development and implementation of policies and practices for the entire group.
Lack of oversight has shown up as a major weakness in the financial industry since the collapse of United States’ sub-prime mortgage market, as certain banks and investment firms have only recently discovered the extent of complicated, high-risk instruments on their balance sheets.
As banks continue to reduce lending activities and cause the credit supply to contract, the world economy is fraught with “considerable downside risks”, said Dr Tan, adding that “a period of extreme uncertainty” is afoot.
However, he said a sharp turnaround in sentiment and the markets could take place if policymakers in the US and elsewhere respond “strongly and appropriately”.
On the other hand, “if such actions by the authorities are not taken within the next three to four months, it will be left to the market forces of supply and demand to stabilise the US housing market before we can see the light at the end of the tunnel”, said Dr Tan.
“This will be a considerably more painful and long drawn process.”
He told some 500 staff in the audience: “The next few years may well be among the most challenging years for GIC since our establishment in 1981. We have to brace ourselves for trying and difficult times, but we are well prepared.”
UBS ADMITS LAX CONTROLS
Excessive risk-taking and a failure to see the severity of the American housing downturn – these were key factors behind UBS’ US$37 billion ($50 billion) writedowns on sub-prime-linked investments, according to a Swiss bank report.
UBS has been the world’s worst-hit bank in the subprime crisis. In December, UBS received a cash infusion of 11 billion Swiss francs ($15 billion) from Singapore’s GIC.
The 50-page report released yesterday pinpointed the key culprit as Dillon Read Capital Management, the bank’s nowdefunct hedge fund; and its investment banking unit, where senior management meetings had an “asymmetric focus” on revenue and profit-and-loss.
The report comes just before tomorrow’s shareholders’ meeting to vote on a second cash injection of 15 billion Swiss francs.
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