Cablegate: Singapore Feels Aftershocks of Wall Street Crisis

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FM AMEMBASSY SINGAPORE
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UNCLAS SINGAPORE 001010

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E.O. 12958: N/A
TAGS: EFIN ECON SN

SUBJECT: SINGAPORE FEELS AFTERSHOCKS OF WALL STREET CRISIS

1. Summary: Singapore is feeling repercussions from this week's
financial crisis on Wall Street, which helped send the local
exchange down nearly seven percent so far this week. Although local
banks are well capitalized and face no serious threat from the
crisis, individual investors in Lehman Brothers instruments are
facing potential losses. News of insurance giant AIG's troubles
prompted policyholders to flood AIG's local subsidiary to redeem
policies, though the central bank reassured policyholders that the
company holds sufficient funds to meet its policy requirements.
Merrill Lynch's takeover by Bank of America has local Merrill
employees anxious about their employment outlook, but may have given
Singapore government-linked investor Temasek Holdings a gift,
turning its huge, thus far money-losing recent investment in Merrill
into a potential money maker nearly overnight. End Summary.

Market slides, but financial sector stable
------------------------------------------

2. The Wall Street crisis sent Singapore's Straits Times Index on
another two-percent slide on September 17, adding up to a nearly
seven percent decline for the first three trading days of the week.
The Singapore dollar has stayed relatively stable at $1.43 to the
U.S. dollar.

3. Singapore banks said their exposure to Lehman Brothers was
minimal. None of Singapore's local banks were listed among Lehman
Brothers' top 30 unsecured creditors. Singapore's central bank, the
Monetary Authority of Singapore (MAS), said in a statement on
September 16 that the country's banks were well-capitalized, but
that "MAS stands ready to inject additional liquidity if the
situation warrants." Individual investors faced potential losses
from Lehman's "minibonds", hundreds of millions of dollars worth of
which Lehman issued in Singapore over the past two years. The
minibonds were backed primarily by collateralized debt obligations
(CDO), the value of which have declined by as much as 70 percent for
some series.

Company struggles reflected in Singapore
----------------------------------------

4. Lehman Brothers: On September 16, the Singapore Exchange
suspended Lehman Brothers from taking on new securities and
derivatives positions. However, the Exchange confirmed yesterday
that Lehman continued to meet its obligations as a clearing member
in the securities and derivatives markets. MAS also directed Lehman
yesterday to seek its approval before paying out any funds to third
parties in order to ensure it met its financial requirements in
Singapore. Lehman's 270 employees were still at work on Wednesday
waiting for an announcement on their future from headquarters.
Lehman's Singapore office was its center for commodities and foreign
exchange trading in Asia.

5. AIG/AIA: Hundreds of policyholders of American International
Assurance (AIA), AIG's Singapore subsidiary, have lined up at AIA's
local office over the past two days to redeem policies. MAS
cautioned policyholders against terminating policies too hastily and
issued a statement yesterday that AIA was meetings its regulatory
requirements to maintain sufficient financial resources to meet its
liabilities to policyholders. AIA maintains a separate insurance
fund for policies issued in Singapore, segregated from its AIG
parent. At end of 2007, AIA's fund was reportedly valued at USD
14.8 billion, invested primarily in fixed income securities.
According to AIA, only three percent of the fund was invested in
CDOs, none of which were rated sub-prime.

6. Merrill Lynch: Singapore's Temasek Holdings, the largest single
investor in Merrill with a 14-percent stake, has kept silent on its
investment and the upcoming swap of its Merrill stake for shares in
Bank of America (BOA). BOA's offer of $29 a share for Merrill Lynch
stock appeared to give Temasek a brief opportunity to net a quick
profit from its USD 5 billion investment in December 2007, though
the slide in the value of BOA's stock after the Merrill deal may
have closed that window for now. After a supplementary purchase in
July, Temasek's average price paid per share was $24, substantially
higher than Merrill's pre-takeover share price of $17. After BOA's
share value dropped this week, Temasek remained technically in the
red. But Temasek has characterized its large financial sector
investments since the beginning of the crisis as long-term strategic
moves, and local analysts predict Temasek will hold tough in order
to maintain a stake in the U.S. financial sector. Merrill's 1600
local employees are awaiting news of possible staff cuts as the
merger takes place. BOA has only approximately 200 employees in
Singapore, meaning less job overlap and what Merrill staff hope will
be fewer job cuts. Merrill had been planning to increase staff in
Singapore, plans that are now in question.
HERBOLD

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