Singapore wealth fund set to inject $5bn into Merrill

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The Independent Online

Singapore's Temasek is locked in talks with Merrill Lynch that would make it the latest government-owned fund to providefinancing to a Wall Street giant laid low by America's sub-prime mortgage crisis.

Temasek, the $108bn fund that is led by Ho Ching, wife of the Prime Minister of Singapore, is locked in talks with Merrill's chief executive, John Thain, over a capital injection of $5bn that would give Singapore up to a 9.9 per cent stake in the bank.

The deal would be the latest in a flurry of Middle East and Asian government funds stepping in to ballast the world's top investment banks, which have together written off $40bn worth of bad bets on the American sub-prime mortgage market.

It is understood that an agreement between Temasek and Merrill could be struck as early as next week. The board of Temasek is understood to have already granted preliminary approval, though details over how much equity the fund will be given and regulatory matters must still be worked out.

The deal would the first significant move by Mr Thain, who was parachuted into the bank on the first of the month after his pre-decessor, Stanley O'Neal, was forced out over a $7.9bn writedown due to poor subprime bets.

News of the talks stoked fears, however, that Mr Thain was getting the cash injection in place to shore up the bank before what some analysts are predicting could be another $8bn in writedowns.

The deal would be the second such intervention from Singapore recently. Earlier this month, UBS received a $10bn injection from Middle East investors and GIC, a larger fund that invests the Singapore government's excess capital.

The country's intervention is part of an unprecedented wave of similar deals struck by some of the world's biggest financial heavyweights with the so-called sovereign wealth funds. Observers say it is indicative of the changing balance of power in the global financial markets, with power slowly tilting toward the developing markets in the Middle East and Asia. Awash in cash from foreign exchange reserves and petrodollars, sovereign wealth funds control an estimated $2.2trn between them.

Wall Street's finest, on the other hand, are feeling the squeeze. This is due mainly to the massive investments made in vehicles underpinned by packages of millions of American home loans. When Americans began defaulting on their loans in record numbers this year, the value of those vehicles collapsed, leading to the massive writedowns.

Citigroup, which posted a massive $11bn writedown, received a $7.5bn injection from the Abu Dhabi Investment Authority that gave the emirate a 4.9 per cent in the world's largest bank.

Thanks to a $9.4bn writedown, Morgan Stanley last week reported its first ever quarterly loss, spurring an investment from China.

Bear Stearns, which had earlier struck a similar deal with the country, also posted its first ever loss in its 84-year history last week.