We Could've Handled CDO Disclosure Better, Says DBS

Source : The Business Times, October 4, 2007

It hurt bank's effort to be transparent, says CFO

DBS Group Holdings said its efforts to be transparent had been hurt by the manner in which it went about disclosing its exposure to collaterised debt obligations (CDOs).

Ms Wong: DBS' chief financial officer said the mistake was to think credit risks on CDOs held by its conduit Rosa would stay as third party risks

A candid Jeanette Wong, DBS chief financial officer, was replying this week to a question from BT on what the bank had learnt from the incident, which according to one analyst had hurt its credibility.

'We have acknowledged to investors and analysts that the manner of our recent disclosure on CDOs could have been better,' said Ms Wong.

The bank had initially claimed that it had investments, including CDOs, amounting to US$850 million.

Then, on Aug 7 it said that it had made third-party sales amounting to US$1.7 billion - S$2.6 billion. What it did not make clear was that this amount included the CDOs held by Red Orchid Secured Assets (Rosa), a DBS conduit.

'At the time, Rosa was still being funded by short-term commercial paper (CP) holders, who bore the credit risks,' said Ms Wong. 'Our mistake was thinking that this would remain as third party (CP holders') risks when clearly we hold the residual risks if the CP holders do not roll over their funding.'

Rosa needed DBS funding as skittish investors declined to renew or roll over their holdings because of turmoil in credit markets caused by the fallout from US sub-prime mortgage defaults.

'We have always acknowledged that Rosa belongs to DBS when asked by analysts and investors. We realised our oversight in not including the conduit's CDO investments as ours when the focus subsequently shifted to conduits/SIVs (special investment vehicles),' said Ms Wong.

To make things clearer for all market participants, DBS shifted Rosa's CDOs from third-party sales to include it as own holdings in a further press release on Aug 27, she said.

'We recognise that this two-step disclosure has hurt our efforts to be transparent. Our intention has always been to be transparent but the way in which we disclosed our CDO exposure could have been better,' said Ms Wong.

The two-step disclosure led to downgrades by some analysts. Goldman Sachs moved the counter from 'buy' to 'neutral', saying DBS, despite its long-term value, had one of the highest exposures to CDOs among Asian banks, excluding Japan's. It added that DBS was the only local bank yet to make any provisions.

JPMorgan Chase also said that DBS was a stock to avoid.

But others felt that DBS had been more open about its CDO exposure.

Said Ms Wong: 'Some investors and analysts however felt that we have been more open about our conduits' CDO exposures, as they have been unable to obtain similar information elsewhere. UBS analyst Jai Singh said in a Sept 20 note on DBS: 'We believe the exposure and risk associated with the CDO is well documented and is firmly in the price.'