StanChart Leaves Investors Out in the Cold

Asian investors who thought they could trust Standard Chartered, the venerable old British bank that has been around Asia for a century and a half, are whistling in the wind for their money.

The group, now 19 percent owned by the Singapore government through Temasek Holdings, is walking away from its US$7.2 billion structured investment vehicle (SIV), appropriately named Whistlejacket Capital. This pile of assets was sold in the form of notes to big-name, deep-pocket clients in Asia and the Middle East. But now that Whistlejacket’s assets have fallen sharply in value, today put at around half the level of six months ago, the bank no longer wants full responsibility for it.

That is perfectly legal. StanChart, like other major banks, enticed clients to acquire various debt assets that it claimed were good investments but were not on the bank’s own balance sheet. When trouble first hit the market in collateralized debt obligations (CDOs) and similar fancy instruments in the wake of the US sub-prime crisis, StanChart offered to provide liquidity to Whistlejacket — but only so long as its assets were worth 95 percent of their book value.

That is no longer the case, so StanChart has walked away and Whistlejacket is going into receivership. Others could have done the same, but to protect their reputations, rivals such as HSBC and Citicorp volunteered to bring the SIVs onto their own balance sheets, requiring them to provide for some US$40 billion in losses and, in Citi’s case, forcing it to go cap in hand to sovereign wealth funds for more capital.

Some investors in Whistlejacket who held short term notes were able to get out, helped by the liquidity facility. But the rest are locked in and may well, according to London sources, lose half or more of their money. That would come as a shock to investors who thought they were buying AA-rated paper. But such a rating was possible through the financial alchemy (approved by ratings agencies) that enabled asset-backed securities — when suitably re-packaged — to acquire superior ratings while delivering higher yields.

Whistlejacket investors will have to wait and see how the assets look to the receiver, and what assistance StanChart will give in providing some ways of disposing of its assets at other than fire-sale prices.

Unwillingness to put Whistlejacket onto its books raises questions about the strength of StanChart’s own balance sheet. The bank has long been a subject of takeover rumors and may now seem a tempting target. However, with so much financial asset destruction over the past year and with more to come, cash-rich investors are likely to hold back till the extent of losses throughout the system is known. Arab, Singapore and China funds may be regretting the amounts they have already pumped into ailing western institutions now that the size of their combined losses is becoming clearer and many more calls for rescue are likely to be heard in the coming months.

This episode must leave a sour taste in the mouth of Temasek, which only recently increased its stake in Stanchart to 19 percent. It acquired 11.5 percent from the estate of the late Malaysian banker Khoo Teck Puat in 2006. Khoo had helped rescue the bank from a takeover in 1986 following write-offs in Southeast Asia and Hong Kong that forced it to sell landmark city-center buildings, including its Hong Kong head office.

Temasek evidently thought it had a good buy, gradually building on the Khoo stake. But with the latest problems, StanChart’s share price is back to where it was two years ago. Temasek’s stake is now on the threshold where this level of holding is becoming a quasi-political issue. At 20 percent it would bring into question whether StanChart could continue to be a note-issuing bank in Hong Kong – a privilege that is of limited practical value but carries much prestige.

Temasek may want to use the price fall to go above 20 percent, on the assumption that the Hong Kong Monetary Authority would not object. Its stake could rise to 30 percent before being required, under British rules, to make a full offer. That looks unlikely given Singapore’s new sensitivity to foreign suspicion of sovereign wealth funds.

Also, while Temasek probably wants to go above 20 percent, it has splurged so much cash on troubled banks that it may bide its time to see if more troubles are in store for StanChart. Nor can it ignore the damage to StanChart’s reputation among those in the Middle East and Asia who had long trusted it as a stable institution.

Standard Chartered was formed in 1969 from the merger of Standard Bank of South Africa, founded in 1863, and the Chartered Bank of India, Australia and China founded in 1853. The South African operations were sold during the apartheid era but Stanchart acquired a big Middle East presence by acquiring Grindlays Bank, another British colonial enterprise.

Today, StanChart has globe-spanning operations and is seen as emerging-market focused. Most of its profit comes from Asia, notably Hong Kong, India and Korea (through its acquisition of Korea First Bank in 2005). It is expanding in the Gulf and has ambitions in China. However it is not the major bank in any significant market and may have been growing too fast for its own good. Even without off-balance-sheet vehicles, its asset base grew 24 percent to $266 billion in 2006. Like so many other financial institutions over the past five years, it may have confused rapid growth in size and profits with its own skill, rather than the era of easy money and buoyant economies.