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Sun 14 Mar 2010 04:00 AM

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Bankers blow $20bn faster than gamblers

The big buzz in Singapore is about the casinos beginning to dot the city-state.

Bankers blow $20bn faster than gamblers
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The big buzz in Singapore is about the casinos beginning to dot the city-state.

Singapore prefers to call them "integrated resorts." Gambling is what it is, though. Welcoming Las Vegas tycoons Sheldon Adelson and Steve Wynn is intended to woo tourists and diversify the economy.

It's not exactly a new idea. The truth is that Singapore has been gambling for some time now, and not very well.

The die was cast when the Government of Singapore Investment Corp, which manages more than $100bn of state currency reserves, bet big on Zurich-based UBS AG. It took three days to agree to prop up debt-laden UBS in 2007. It may take ten years to recoup that $10bn.

Singapore isn't alone in massive losses that may reshape markets - and perhaps for the better.

Two years ago, sovereign wealth funds were heralded as saviours of world markets. That was when Lehman Brothers Holdings Inc seemed too big to fail. It was a quainter time, when Iceland was a country, not a failed hedge fund, and American-style capitalism still had some appeal.

The thinking then was that the trillions of dollars that resource- and cash-rich governments were pouring into markets would out-Greenspan the "Greenspan put."

Former Federal Reserve chairman Alan Greenspan liked to rescue markets with lower rates when things got dicey. Likewise, investors figured this almost infinite source of demand would support riskier assets and stabilise markets. Capitalism suddenly seemed safe for all gamblers.

Markets had a new shock absorber and it appeared to work brilliantly. As the global crisis heated up and banks shuddered, government investment arms helped support Citigroup Inc, Merrill Lynch & Co and UBS, as well as Barclays Plc, Credit Suisse Group AG and Morgan Stanley. Then the roof fell in.

Investments totalling more than $69bn by state investment funds produced $20bn in realised and paper losses, according to data compiled by Bloomberg. Blowing that much money means managers of these funds will be under greater scrutiny than ever.

China Investment Corp is the big money in this tale, since China has $2.4 trillion of reserves. It still has explaining to do over a $3bn investment in Blackstone Group LP in 2007. Blackstone shares have fallen 52 percent since Jan 1, 2008.

Abu Dhabi Investment Authority may face a $4.8bn paper loss when it's forced to convert its so-called Citigroup equity units to shares starting this month. In Singapore, Temasek Holdings Pte, a state-owned investment company that oversees $120bn, sold its shares in Bank of America Corp - BofA bought Merrill Lynch, in which Temasek invested - for a $4.6bn loss in early 2009.

Such investments may pay off in the long run. For example, in the Government of Singapore Investment Corp's annual report, published in September, chief investment officer Ng Kok Song said he still has "confidence" in the long-term prospects of the UBS investment.

Expect to see far greater conservatism on the part of governments investing overseas. It's not such a bad turn of affairs. This whole idea that massive state investment funds would save capitalism was always a bit surreal. It's a wonder the free-market crowd was ever peddling it.

Let's call it what it is: Thatcherism in reverse. During the 1980s, UK prime minister Margaret Thatcher championed a process of selling national assets, arguing that private managers create more wealth than public ones. Recently, we have seen a kind of renationalisation of companies across borders. Is this how capitalism is really supposed to work?

If so, tensions will rise markedly. Would the US sit idly if China went shopping for big stakes in Silicon Valley? What about Australia, New Zealand and Canada as foreign governments consider buying key resource companies? How might Japan or South Korea react to acquisitions of their banks?

These questions were touchy before the worst global crisis since the 1930s. Its fallout makes them even harder to tackle as nations turn inward to boost employment and shelter populations from global shocks.

This year has served up its fair share of disorientation. Look no further than market chatter about Greece turning to China for a bailout. After all, China's cache of reserves dwarfs what the International Monetary Fund has on hand to deploy.

If the doomsayers are correct that an even bigger crisis is looming, sovereign wealth funds may be expected to save the day. As the world shifts from economies that are too big to fail to those that are too big to save, it will be tempting to access all that state money sitting around.

Greece is one thing. Think of the cost of bailing out a $1.6 trillion economy like Spain or even larger ones.

Governments aren't meant to dominate markets in the long run. The global crisis brought them in to stabilise things, and greater regulation is needed to avoid another meltdown in the not-so-distant future.

When we talk about exit strategies, though, we should think about more than winding down stimulus efforts. We also should consider whether governments really should dominate the global finance game in the years ahead. Talk about gambling with capitalism's future.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

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