UBS BAILOUT: GIC TRIES ITS HAND AT TRANSPARENCY

UNCLAS SECTION 01 OF 02 SINGAPORE 002257

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SENSITIVE
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STATE FOR EAP/MTS/PMPS
STATE PASS USTR FOR DAUSTR BELL
STATE PASS TREASURY SSEARLS, RKAPROTH

E.O. 12958: N/A
TAGS: EFIN EINV ECON ECIN ETRD SN
SUBJECT: UBS BAILOUT: GIC TRIES ITS HAND AT TRANSPARENCY

REF: BERN 01128

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1. (SBU) Summary: The $11.2 billion investment in Union
Bank of Switzerland (UBS) by Singapore's Government
Investment Corporation (GIC) generated cries (reftel) of
"Black Monday" in Switzerland, but in Singapore the
investment is widely seen as positive not only for the
financial sector but also for efforts to make GIC itself
more transparent and open. GIC, in an unprecedented press
conference to announce the investment, said that it intends
to play a key role in formulating a set of guiding principles
for sovereign wealth funds (SWFs). GIC's management laid out
specific areas where it is prepared to be more transparent,
including disclosing the fund's investment objectives, general
strategy, internal and external governance structure and risk
management systems. While this is an improvement for the
historically opaque investment fund, some critics will not be
satisfied without more transparency on GIC's financial
information. End summary.

GIC -- Largest Shareholder in UBS
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2. (U) Cries of "Black Monday" in Switzerland (reftel)
followed UBS's December 10 announcement of plans to write off
an additional $10 billion in losses on collateralized debt
obligation (CDO)-related investments and UBS's revelation that
GIC and an unnamed Middle Eastern investor are investing 11
billion Swiss francs (US$13.9 billion) in the bank's
convertible bonds. These bonds will pay an annualized interest
rate of 9 percent until they are converted into shares. Once
converted, GIC will own approximately 9 percent of UBS shares,
making GIC the largest shareholder in Europe's biggest bank by
assets.


3. (U) The investment marks a departure from GIC's traditional
policy of portfolio diversification that relies on taking
relatively small stakes in public equities. In contrast, GIC's
sizeable investment in UBS parallels similar high-profile
investments in 2007 by SWFs in global financial institutions,
including:

-- Singapore's Temasek Holdings and Davis Select Advisors'
December 24 investment in Merrill Lynch shares worth $6.2
billion.

-- Abu Dhabi Investment Authority's November 27 investment in
Citigroup convertible bonds worth $7.5 billion.

-- China Investment Corporation's December 19 investment in
Morgan Stanley shares worth $5.0 billion.

Improving Transparency and Openness at GIC
--------------


4. (U) In Singapore, GIC's investment in UBS is widely seen
as positive, not only for the financial sector but also for
efforts to make GIC itself more transparent and open. GIC
held an unprecedented press conference to explain its
multi-billion dollar investment. GIC Deputy Chairman (and
Singapore's former deputy prime minister) Tony Tan said
that "the fact that we are calling the press conference today
is an indication that we would like to share this transaction
with you, a chance to put forth any queries you might have."
Tan said GIC made the investment for purely commercial
reasons and that it did not intend to gain control, influence
management, or seek representation on the UBS board of
directors.


5. (U) Tan said that GIC would play a leading role in
addressing global concerns about SWFs, which are growing in

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size (see table 1). He said "Singapore will participate
actively in efforts to formulate a set of principles and best
practices for SWFs. GIC believes that it can contribute in a
positive way to the framework for greater disclosure."

Table 1: Estimated Size of Largest Sovereign Wealth Funds
============================================= =============
Name Date Established ($ billion)
============================================= =============
Abu Dhabi Investment Authority (ADIA) 1976 875
Norway's Government Pension Fund 1990 329
Kuwait Investment Authority 1960 213
Singapore's GIC 1981 330
Russian Stabilization Fund 2004 141
Singapore's Temasek 1974 108
China's Central Huijin Investment Co 2003 68
Qatar Investment Authority 2005 50
Australia Future Fund 2006 49
Algeria Revenue Regulation Fund 2000 43
============================================= ==============
Source: The Edge (December 17, 2007)


6. (U) Tan said SWFs have to help alleviate through greater
transparency U.S. and European concerns about the funds'
growing influence. He said that "there is a case for
further disclosure on the part of SWFs, in the interest of
transparency. Such disclosure can include clarity on the
relationship between SWFs and their respective governments,
their investment objectives and general strategies, and their
internal governance and risk management practices." Tan said
that "any guidelines for SWFs should encourage them to operate
according to commercial principles with (a) long-term view and
which are free from political motivations." At the same time,
he warned, "recipient countries should not adopt policies that
inhibit cross-border investments or discriminate against SWFs."

Comment: Will GIC's Transparency Strategy Work?
-------------- --


7. (SBU) Analysts see GIC's openness about the UBS investment
and its alignment with the calls for SWF best practices as a
response to the growing chorus of concerns from the United
States and Europe about the increasing clout of SWFs. GIC's
moves toward transparency are a step forward for the usually
secretive SWF. However, GIC has been very specific about what

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it is prepared to disclose and steadfast in its opposition to
disclosing either its total size or its financial statements.
Very few officials at the Ministry of Finance, GIC's sole
shareholder, know the total value of the GIC's assets and
the Minister of Finance maintains the position that disclosing
such information would lead to inappropriate pressures to spend
the funds. It remains to be seen whether laying out the fund's
motivation, structure, governance, and risk management will
provide enough evidence of purely commercial intentions to
allay critics' concerns. End
Comment.

Visit Embassy Singapore's Classified website:
http://www.state.sgov.gov/p/eap/singapore/ind ex.cfm
HERBOLD