INVESTMENTS BY GOVERNMENT AND STATUTORY BOARDS IN LEHMAN-LINKED FINANCIAL PRODUCTS

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INVESTMENTS BY GOVERNMENT AND STATUTORY BOARDS IN LEHMAN-LINKED FINANCIAL PRODUCTS: 3.

Ms Sylvia Lim asked the Minister for Finance whether Government entities and statutory boards have invested in structured notes linked to Lehman Brothers or similar products and, if so, what is the extent of the investments made and the losses incurred.

4.

Mr Siew Kum Hong asked the Minister for Finance (a) whether any Government agencies or statutory boards have invested in Lehman-linked structured products or other financial products that are directly or indirectly backed by, or linked to, collaterised debt obligations (CDOs) or credit default swaps (CDS); and (b) if so, what were the purchase prices of such investments and their current values.

Mr Tharman Shanmugaratnam: Mr Speaker, Sir, Question Nos. 3 and 4 are both closely related. So, with your permission, I would like to take them together.

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Mr Speaker: Yes.

Mr Tharman Shanmugaratnam: Statutory boards keep some surpluses for future capital expenditures and as a buffer against unanticipated spending needs or budget shortfalls. They manage and invest these funds in financial assets to earn an appropriate return within acceptable risk limits, after taking into account their cashflow and liquidity needs. Each statutory board has to ensure that an appropriate investment management structure is in place for proper oversight of its financial investments with prudent risk management.

As of 31st October 2008, there were no statutory boards holding Lehman Minibond notes and other credit-linked notes for which early redemption has been triggered, in other words, which have either defaulted or early redemption has been triggered. This includes, besides the Lehman Minibond notes, Merrill Lynch Jubilee Series, DBS High Notes 5, Morgan Stanley Pinnacle Series 9 and 10 Notes. So no statutory boards have had exposure to any of these notes for which there has been early redemption triggered. Four statutory boards had other credit-linked notes in their investment portfolio which are unrelated to what I have just described.

None of the underlying entities and assets referenced to by these credit-linked notes have defaulted or had early redemption triggered. On a marked-to-market basis, these credit-linked notes held by the four statutory boards had not performed very differently from the performance of global market generally this year. The four statutory boards are nevertheless monitoring the situation on all their investments, not just this small amount of credit-linked notes but all their investments, and will take the necessary steps to minimise any losses on these investments.

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Mr Siew Kum Hong had also asked specifically about whether the statutory boards have exposure to collateralised debt obligations (CDOS) and credit default swaps (CDSs).

One statutory board has financial products, other than credit-linked notes, which are linked to CDOs and CDSs. These products comprise around 0.1% of the statutory board's portfolio and, as it happens, they have also made a net gain over the year on these products.

Mr Siew Kum Hong (Nominated Member): Sir, I have two supplementary questions for the Minister. First, will the Minister name these statutory boards in question?

Second, the statutory boards that have invested in these products in the search of higher returns would have undertaken higher risks. So, I would like to ask the Minister what were the overall returns of these statutory boards' investments over the past five years. Particularly, did the statutory boards have a good historical track record of investments so as to justify the undertaking of such higher risks in search of higher returns?

Mr Tharman Shanmugaratnam: First, on the statutory boards which have the exposure. To repeat, none of the statutory boards have any exposure to credit-linked notes which have seen early redemptions triggered.

I should add that the universe of credit-linked notes includes both relatively safe instruments which are backed by very safe underlying securities – including those of some major Singapore companies – as well as credit-linked notes which are closer to the moderate to higher end of the risk spectrum. So there is nothing in credit-linked notes per se that speaks about high risk. I would like to clarify that. But in the interest of transparency – because I was asked about exposure to

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credit-linked notes – I provided that there are four statutory boards that do have some exposure to some credit-linked notes. Their performance on those notes alone has not been very different from that in global markets. In fact, I can tell Members that on those credit-linked notes alone, they have suffered a paper loss of about 14% in the course of this year. Fourteen percent, as you know from what is going on in the global markets, is not an extraordinary paper loss.

The four statutory boards concerned are Civil Service College, Singapore Land Authority, Infocomm Development Authority and the Professional Engineers' Board.

The exposure to these credit-linked notes, as a percentage of total investment portfolios of our statutory boards collectively, was about 0.05%. So, it is not a large sum. All our statutory boards are advised, not just for credit-linked notes – which I have just explained – are not always high risk. I advise in investment portfolios to maintain sound principles of diversification and risk management.