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Tuesday, December 11, 2007

Random Musing On Capital Injection...

Do you think the credit crisis that has rocked the financial sector these few months has finally seen some light?

UBS AG (NYSE: UBS) writes down another $10B, BUT receives $11.5B injection from outside investors, of which my government (yes, The Government of Singapore Investment Corporation - GIC) made its single largest investment ever. The GIC expresses confidence in the long term prospects of the bank and GIC's managing director commented that this move is a marked departure for GIC, whose practice has been to take relatively small public equity stakes for portfolio diversification.

In my opinion, UBS is smart to announce the write-down TOGETHER with news of capital injection, hence preventing a hit in its stock price. Next, for the also very smart and usually cautious GIC to have made such a bold move says alot about this deal.

The troubled mortgage insurer, MBIA Inc. (NYSE: MBI) also announced yesterday that it sees Q4 mark-to-market loss significantly more than Q3, yet the stock rallied. Why? Because of the $1B investment from Warburg Pincus. Earlier on, Citigroup Inc.(NYSE:C) sold Abu Dhabi Fund $7.5B Stake.

While many may argued that these banks must be in dire states to resort to selling it self (ok, or more positively, get capital injection), there is always another side to the coin. Put in this way: The investors who provide these huge capital are not stupid. They must have seen value in these business and feel the price is right before taking the plunge.

While this doesn't mean that we won't see more write-downs to come (as I'm writing this, we've got Washington Mutual, Inc.(NYSE:WM) taking a $1.6B write down, I think we are starting to see some light at the end of the tunnel.

Oh and a lesson to be reminded to all companies out there who plan to announce write downs: Be sure to have an announcement ready about capital injection from who-&-who, if you want to protect your stock price.

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