Merrill’s Largest Shareholder Sees Value in U.S. Banks

Includes: LEH, MER
by: Ron Haruni

State-owned wealth funds which are based on current account surpluses have existed at least since the 1950s. However, their total size worldwide has increased significantly over the past two decades. During fiscal 1990, sovereign funds held close to $500 billion — the current total is now estimated at almost $3 trillion. Based on the likely trajectory of current accounts, total estimates could go as high as $10 trillion by 2012.

Since last year, sovereign funds have gained attention and influence on the global financial markets, when they began exerting dominance over hedge funds and private equity as the main driver of corporate takeover activity. So now it matters what a state-owned wealth fund really thinks about a specific company or Wall Street in general.

One such sovereign fund is Temasek Holdings Pte. Ltd., which manages a portfolio of more than $130 billion and has pumped billions of dollars into Western banks. Singapore’s second-largest sovereign wealth fund is the biggest shareholder in Merrill Lynch & Co. (MER), owning close to a 10% stake in the leading investment bank. Temasek may even acquire a larger stake in a bet the U.S. securities firm will rebound. According to DowJones, Temasek sees value in banking stocks in the United States.

The fund’s Senior Managing Director Manish Kejriwal told journalists:


The financial service industry is one we believe in. If anything, the (Merrill management) team has gotten stronger over the last eight months. Temasek’s confidence in Merrill CEO Thain and his team “remains high”.


Kejriwal also added that the fund “is concentrated on U.S. and UK primarily because it sees value.” The Senior Managing Director, however, didn’t say or give an indication as to whether Temasek would be interested in buying a stake in investment bank Lehman Brothers Holdings Inc. (LEH), which has been looking for potential buyers in Asian countries like China and Korea. Regardless, it’s nice to finally see major players attribute some faith in the bounce-back potential of the banking sector and the financial industry in general.

Merrill’s shares have fallen more than 50% since Dec.07, when Temasek first paid $5 billion for about 5% of the third-biggest U.S. securities firm. In July, Merrill said it would issue $3.4 billion in new shares to Temasek as part of an $8.5 billion fund-raising exercise.

Sovereign wealth funds including Temasek, Kuwait Investment Authority and China Investment Corp. have contributed more than $200 billion of capital for several U.S. banks after losses and writedowns from the U.S. subprime meltdown.