StanChart Leaves
Investors Out in the Cold
Another great investment bombed !
Philip Bowring 12
February 2008
Investors are left to fend for themselves in the latest
chapter of the global banking mess
Asian investors who thought they could trust Standard Chartered, the venerable old British bank
that has been around Asia for a century and a half, are whistling
in the wind for their money.
The group, now 19 percent owned by the Singapore
government through Temasek Holdings, is walking away from its
US$7.2 billion structured investment vehicle (SIV), appropriately
named Whistlejacket Capital. This pile of assets was sold in the
form of notes to big-name, deep-pocket clients in Asia and the
Middle East. But now that
Whistlejacket’s assets have fallen sharply in value, today put at
around half the level of six months ago, the bank no longer wants
full responsibility for it.
That is perfectly legal. StanChart, like other major
banks, enticed clients to acquire various debt assets that it
claimed were good investments but were not on the bank’s own
balance sheet. When trouble first hit the market in collateralized debt obligations (CDOs) and
similar fancy instruments in the wake of the US sub-prime crisis,
StanChart offered to provide liquidity to Whistlejacket — but
only so long as its assets were worth 95 percent of their book
value.
That is no longer the case, so StanChart has walked
away and Whistlejacket is going into receivership. Others could
have done the same, but to protect their reputations, rivals such
as HSBC and Citicorp volunteered to bring the SIVs onto their own
balance sheets, requiring them to provide for some US$40 billion in
losses and, in Citi’s case, forcing it to go cap in hand to
sovereign wealth funds for more capital.
Some investors in Whistlejacket who held short term
notes were able to get out, helped by the liquidity facility. But
the rest are locked in and may well, according to London sources,
lose half or more of their money. That would come as a shock to
investors who thought they were buying AA-rated paper. But such a
rating was possible through the financial alchemy (approved by
ratings agencies) that enabled asset-backed securities — when
suitably re-packaged — to acquire superior ratings while delivering
higher yields.
Whistlejacket investors will have to wait and see how
the assets look to the receiver, and what assistance StanChart will
give in providing some ways of disposing of its assets at other
than fire-sale prices.
Unwillingness to put Whistlejacket onto its books
raises questions about the strength of StanChart’s own balance
sheet. The bank has long been a subject of takeover rumors and may
now seem a tempting target. However, with so much financial asset
destruction over the past year and with more to come, cash-rich
investors are likely to hold back till the extent of losses
throughout the system is known. Arab, Singapore and China funds may
be regretting the amounts they have already pumped into ailing
western institutions now that the size of their combined losses is
becoming clearer and many more calls for rescue are likely to be
heard in the coming months.
This episode must leave a sour taste in the mouth of
Temasek, which only recently increased its stake in Stanchart to 19
percent. It acquired 11.5 percent from the estate of the late
Malaysian banker Khoo Teck Puat in 2006. Khoo had helped rescue the
bank from a takeover in 1986 following write-offs in Southeast Asia and Hong Kong that forced it
to sell landmark city-center buildings, including its Hong Kong
head office.
Temasek evidently thought it had a good buy, gradually
building on the Khoo stake. But with the latest problems,
StanChart’s share price is back to where it was two years ago.
Temasek’s stake is now on the threshold where this level of holding
is becoming a quasi-political issue. At 20 percent it would bring
into question whether StanChart could continue to be a note-issuing
bank in Hong Kong – a privilege that is of limited practical value
but carries much prestige.
Temasek may want to use the price fall to go above 20
percent, on the assumption that the Hong
Kong Monetary Authority would not object. Its stake could rise
to 30 percent before being required, under British rules, to make a
full offer. That looks unlikely given Singapore’s new sensitivity
to foreign suspicion of sovereign wealth funds.
Also, while Temasek probably wants to go above 20
percent, it has splurged so much cash on troubled banks that it may
bide its time to see if more troubles are in store for StanChart.
Nor can it ignore the damage to StanChart’s reputation among those
in the Middle East and Asia who had long trusted it as a stable
institution.
Standard Chartered was formed in 1969 from the merger
of Standard Bank of South Africa,
founded in 1863, and the Chartered Bank of India, Australia and
China founded in 1853. The South African operations were sold
during the apartheid era but Stanchart acquired a big Middle East
presence by acquiring Grindlays Bank, another British colonial
enterprise.
Today, StanChart has globe-spanning operations and is
seen as emerging-market focused. Most of its profit comes from
Asia, notably Hong Kong, India and Korea (through its acquisition
of Korea First Bank in 2005). It is expanding in the Gulf and has
ambitions in China. However it is not the major bank in any
significant market and may have been growing too fast for its own
good. Even without off-balance-sheet vehicles, its asset base grew
24 percent to $266 billion in 2006. Like so many other financial
institutions over the past five years, it may have confused rapid
growth in size and profits with its own skill, rather than the era
of easy money and buoyant economies.
