Banking: will Singapore unravel UBS holding?

It may or it many not be coincidental - but it is at least instructive to look at the timing of the announcement - and some background.

It is now more than two years since Bloomberg announced that Singapore had overtaken Switzerland as a centre for private banking. UBS has been at the forefront of that development.

But the bank has also been subjected to a tirade of attacks, first by the Philippines government, then by African governments (both over funds plundered from countries and alleged to have been warehoused in UBS) and, most lately and most worryingly, the USA.

Last week, the USA, the Swiss government and UBS did a deal with forces UBS to reveal information relating to some 4,500 US taxpayers with accounts in the bank. Those accounts - it appears - are held in Switzerland.

It would not be paranoid to imagine that the USA is looking for other centres where its citizens may be storing money. And that, inevitably, will lead to Hong Kong, Dubai, London and - importantly for this analysis - Singapore.

It was in December 2007 that GIC announced that it was putting just shy of USD10,000 million into UBS - where it was widely seen as a bail-out. GIC Deputy Chairman said at the time that the investment could give Singapore almost 10% of one of the world's biggest banks.

That was then, and this is now.

On Friday, the Swiss government sold the 9.3% of the company it received in return for its bail-out money less than a year ago: GIC pointedly stayed away. GIC says that it "remains confident" that its original investment will stack up.

The problem is that at the price struck by the Swiss government represents a dramatic fall in the value of the shares GIC did buy: down from SF11,000 million to just SD4,000 million. For sure, there are some payments due on coupons but those only amount to some 200 million

Initial media reports in Singapore on Friday said that Temasek was selling its holding in UBS. Research showed that the holding was by GIC and that GIC was not selling. The story disappeared from later news bulletins.

But the issue for Singapore is one of reputation. Already the more rabid parts of the US media are focussing on the city state. And they are supported by rent-a-quote talking head Jack Blum.

Blum told the National Post, which would fail any test to identify balanced reporting, "the next big target should be Singapore." The problem is that Blum has a substantial following in Washington. What he says is often accepted by politicians of all hues without question: he has become the eminence gris of all things to do with money laundering, largely as a result of his work in the BCCI case; he is one of a number of people who leveraged their work in that case into a substantial profile. Blum has a habit of placing the blame for all money laundering on foreigners - and failing to draw attention to the fact that the same mechanisms are available within the USA. That, after all, is where his clients are.

He is quoted as saying "As a result of the pressure on Switzerland, a lot of the client bank accounts have been shifted off to Singapore. UBS said [last year] it will co-operate in giving up the names, so billions fled and it all appears to be heading to Singapore."

It's not true: but that's not the point. If the US Government decides to go after a target, it doesn't let the truth get in the way of a good fiction. Just ask Banco Delta Asia.

For now, then, there remains a big question for GIC: can it afford to be a major shareholder in a bank that the USA has in its sights, especially in its sights for its operations in Singapore?

And if - or more likely when - that attack comes, how will Singapore manage the conflict of interest it will create. Switzerland held onto their shares until after the terms of the deal were done. But that might not be an option for Singapore: its shares are open market shares, not a special deal for the government where it is headquartered.

And so it might find that any attempt to sell a block of shares is seen as a fire sale. Often Singapore sells blocks in private placements, and the terms are often not made fully open. But it might have a little more difficulty in making that happen this time as there will be political interest - and the USA will no doubt feel that, if it can force both financial and reputational cost to Singapore, it will discourage investment in other banks providing similar services.

In this, the USA should be careful what it wishes for. Its largest banks are big players in the same markets.

If Germany has the courage to take on the USA, then Citigroup and the US government could find themselves in the US courts with similar allegations being made as have been made against UBS.

And that is one fight the USA really does not want to have.