We have drawn in many professionals, especially in financial services, which has expanded to its highest ever levels. Many financial institutions have moved their top people and their regional headquarters to Singapore...
In what has become a landmark speech Minister Mentor pointed out in July 2007 that, thanks to his party, the economy was headed skywards: Tourism, consumer confidence, job creation, inflow of wealth, etc were all at an all time high. Not only was the economy going great guns, social development was apparently also doing swimmingly.
In fact things were so rosy then that Mr Lee couldn't hide his excitement: "If there are no wars or oil crises, this golden period can stretch out over many years."
Barely one, let alone many, later Singapore's economy started to go into a tailspin – and, might it be pointed out, there were no wars or oil crises.
In other words, the MM's prediction was spectacularly wrong – not that there is anything surprising with that, Mr Lee had been wildly off the mark many times before:
In January 1998 Mr Lee predicted: "I don't think you're going to get a significant or dramatic political change in Indonesia." Four months later, Suharto was toppled.
In 1995, the then Senior Minister proclaimed: "Both the Suzhou and Singapore sides recognise that they need to work as a team for the Suzhou Industrial Park to compete successfully..." Three years later, the project collapsed.
In 1997 just prior to the general elections, Mr Lee told HDB residents that upgrading would lead to a "40 to 50 percent increase in the value of your HDB property." Before the year was over, property prices plunged with the advent of the Asian financial crises.
There's nothing wrong, of course, about making bad predictions. Let's be fair, everyone at some point has made calls that have turned out embarrassingly wrong. Mr Lee has made, and will make, his fair share.
The difference with the MM's words is that they drive policy formulation which involves spending of billions of dollars of public monies. Once spoken, these words precipitate PAP groupthink; few dare to tell the Mr Lee that he is wrong, let alone hold him accountable for his errors in judgement which have catastrophic consequences.
Oracle of the East he is not but you wouldn't know that if you spoke to the servants with whom the MM surrounds himself and on whom he lavishes made-in-heaven salaries. These highly intelligent individuals apparently go into a synaptic short-circuit when they are in his presence and suspend all form of independent thinking.
Herein lies the danger, which is that of allowing one man to call the shots and of accepting Mr Lee's propaganda that he and the people he has anointed are the only one's who have the answers to our future. This danger must be highlighted, and highlighted again and again until it drenches our national psyche.
In the beginning...
It is clear from his utterances in that fateful 2007 speech how little Mr Lee understood of the economic world. Just months before the crash of the global financial labyrinth, at a time when the system was at its bursting point, the MM told us all:
Indeed, Mr Lee and his ministers had gone into overdrive to push Singapore to be the financial capital of the world, regardless of whether our national infrastructure was equipped to handle such a brutal and risky transformation or not. He did not see, nor did he understand, the decadence that had enveloped Wall Street and that the corruption was already driving the world's financial system to its knees. He was still telling Singaporeans that the boom could go on for years.
Here's what had happened: Banks in the US were hedging on the housing mortgage market through financial instruments they called "credit default swaps".
These fancily named derivatives were really nothing more than side bets -- not unlike the kind that avid football fans place when they watch two teams play each other. The bettors need not buy a direct stake in the teams but stood to gain or lose depending on the outcome of the game.
This was what happened at the banks: Essentially, bets were taken on how the mortgage-loans performed. If mortgagees defaulted on their loans, insurance would be paid out through the credit swaps that investors purchased.
Of course, the financial institutions raked in the money when the US housing market was on a roll between 1996 and 2006, with much of activity fueled, unfortunately, by unscrupulous lending. Housing loans were given to people, called subprime borrowers, who did not meet the criteria for borrowing at the prevailing interest rate. This was a recipe for trouble because as soon as the US economy and the housing market started to wobble, many of these borrowers were unable to keep up with their loan payments.
Then someone screamed "Subprime!" and all of a sudden the housing industry pancaked. Mortgage delinquencies and foreclosures escalated as Americans defaulted on their housing loans and banks were left high and dry.
But as bad as the debacle was, it still wasn't the worst thing that happened to the banks. On the side, investors came a calling and wanted to be paid because they had bought the credit default swaps. The problem was that the banks and investment houses had sold so much of these instruments that they were simply overwhelmed by the amounts they owed (estimates have it in the trillions of dollars). Unbelievable as it may seem, these financial institutions did not set aside any funds to make these payouts. The scheme was really nothing more than legalised gambling run by over-leveraged bookies. Hence the banking meltdown.
Of course, hind-sight suffers not from astigmatism. But there were many signs that all was not right within the financial world. Billionaire investor Mr Warren Buffet had repeatedly warned of the scourge of the derivatives market, calling them "weapons of mass financial destruction”.
As early as 2002, Mr Buffet was already warning: "I view derivatives as time bombs, both for the parties that deal in them and the economic system.”
In 2003, he repeated his message that derivatives can push companies onto a "spiral that can lead to a corporate meltdown" and didn't mince words saying that these financial schemes have been devised by "madmen".
Mr Buffet rang the warning bell again in May 2007: "There is an electronic herd of people around the world managing an amazing amount of money...I think it's a fool's game."
As prescient as he was, Mr Buffet was not the first to sound the alarm against the Wall Street whiz kids. Dr Frank Partnoy, an investment banker himself before he became a professor at the University of San Diego, had written a book back in 1997 entitled F.I.A.S.C.O. in which he warned about the shenanigans that were going on in the financial houses.
He authored another book in 2003, Infectious Greed, where he again called attention to the marketing of derivatives and how this was destabilising the financial market.
Another academic, New York University's Dr Nouriel Roubini, had warned at the World Economic Forum in 2007 that a "hard landing” was about to come with the bubbles created by the financial system. (Were any of our ministers there?) He predicted that all the unbridled wheeling and dealing would end in "painful consequences for the U.S. and the global economy.”
Note that these red flags were all raised before Mr Lee Kuan Yew made his "golden period” speech (Mr Buffet's "fools' game" warning came just two months before).
In fact, just before the MM's speech, Bear Stearns, then the fifth largest investment bank in the US, was breathing its last breaths. Two of its hedge funds were up to their eyeballs in the mortgage derivatives market and they were bleeding funds. The bank was losing so much money that shortly thereafter it filed for bankruptcy.
If the Buffets and Partnoys were screaming about the risks, and if Bear Stearns had collapsed in such a stunning fashion, why did Mr Lee and his cabinet ministers not note these danger signals and adopt a more cautionary tone in his speech? Were they all asleep at the wheel?
But not only was there no circumspection, Mr Lee was urging everyone to "maximise our opportunities in this golden period”!
In competence and in experience
Mr Lee had claimed sole credit for himself and his ministers that things had gone on so well. He actually started off his speech with this:
Every night there is this buzz along Orchard Road. It is because a competent and experienced team of ministers took painful and unpopular measures in the last few years since the Asian financial crisis to get our domestic policies to encourage growth. Tourism is up. Consumers have confidence; restaurants, food courts are thriving; unemployment has remained low at 2.9 per cent with a healthy creation of 49,000 jobs for the first quarter this year. This is on top of a record creation of 176,000 jobs in 2006. We are into a period of good economic growth and social development. (emphasis added)
"Competence”, "experience”, and the ability to "anticipate events” are the words Mr Lee chose to describe himself and his ministers, and to justify their salaries. Indeed if they all possessed such traits of distinction why did they not see, and warn Singapore of, the crisis that was brewing and all the warning signs that were hollering for attention?
Now that the MM's rhetoric has been so extravagantly shown up, there is only silence within the establishment. Speech? What speech? seems to be the new strategy going forward. Everyone pretends that it was never made. And yet, that speech is probably the most serious misjudgment of Mr Lee's carreer.
But among the many words that Mr Lee has spoken only one matters, but it is one that we will not hear: Accountability.
(highlights even more of Mr Lee's wayward predictions and how they have made the current economic situation even more painful than it has to be.)
In Part I of this essay, I drew attention to the fact that Mr Lee Kuan Yew was negligent when he, in a speech he delivered in July 2007, called on Singaporeans to "maximise our opportunities in this golden period.” This happened at a time when the world's economy was already teetering on the brink.
But some argue that Mr Lee is no longer the prime minister and hasn't been one for nearly two decades. Why should he be the one to take the blame? Take a look at what he wrote in his memoir:
Singapore's financial centre was considered over-regulated compared to Hong Kong's. Critics wrote: "in Hong Kong, what is not expressly forbidden is permitted; in Singapore, what is not expressly permitted is forbidden”...Only after the MAS (Monetary Authority of Singapore) had demonstrated the strength of its system to weather the financial crisis of 1987 and 1997-98 did I feel confident enough to move closer to a position where what is not expressly forbidden is permitted.
But why is a speech Mr Lee made in 2007 even important in the present crisis?
If you were a Lehman Brothers' investor back then and had heeded the MM's advice, you would have ploughed even more money into buying the minibonds. (Some of the Town Councils obviously did.) If you were looking to buy a house, you would have paid top-dollar for the bubble property price. And if you were looking to start a business then, you would have borrowed heavily to capitalise on the boom.
And if you were Mr Lee or his daughter-in-law, Ho Ching, you would have placed tens of billions of dollars of our reserves in Western banks. Which is exactly what they did.
Banking on banks
The Government of Singapore Investment Corporation (GIC) and Temasek Holdings, led by Mr Lee and Madam Ho respectively, were merrily maximising their opportunities by bailing out European and American banks even as these companies were going bust due to corruption, greed, and bad management.
In the second half of 2007 Swiss bank UBS had written off US$33 billion due to bad debts and exposure to the US subprime crisis. Despite this meltdown, the GIC incredibly injected nearly US$10 billion into the bank in December that year. Four months later, UBS wrote down another US$19 billion.
Matters for the bank worsened in November 2008 when one of its senior officials, Raoul Weil, was indicted in the US for conspiring to help 20,000 wealthy Americans evade taxes amounting to an estimated US$20 billion. He was declared a fugitive by the US Government and has since stepped down from his post at the bank. The latest news is that the Swiss bank has posted a total loss of US$17 billion for 2008.
Despite what had happened at UBS, Mr Lee was still feeling bullish with our money and made another investment of US$6.9 billion in January 2008, this time in Citigroup. Within months, the US banking giant collapsed and had to be rescued with a bailout of more than US$300 billion from the US Government.
But Citi's executives, as financially and morally bankrupt as they were, still found enough chutzpah to take receipt of an exclusive luxury jet worth US$45 million. They only reversed course after warnings emanated from the US Government about their profligacy. These are the kinds of people with whom MM Lee had entrusted our savings.
Not to be outdone, Temasek announced in July 2007 that it had invested $4.5 billion in Barclays Bank. That same year the bank announced a US$2.7 billion write-down.
Temasek also started to invest in Merrill Lynch in December 2007. Madam Ho Ching gradually increased Temasek's stake in Merrill until it reached US$5 billion in 2008. The company, owned by the Ministry of Finance, said that it was buying in to Merrill because of its "great franchise, which has existed through many crises through a long period of time.”
In September 2008, the American company went bust and had to be taken over by Bank of America.
Temasek gave another reason for the investment: It "had great confidence in [Merrill's CEO] John Thain.” Four months after BoA's takeover Mr Thain was forced to step down. The reason? He had not fully disclosed all of Merrill Lynch's losses. Even in the firm's dying months, Mr Thain had spent US$1.2 million of company money to renovate his office – including US$87,000 for a rug, US$25,000 for a table, US$87,000 for guest chairs, US$35,000 for a commode and US$1,400 for a wastebasket.
Madam Ho must have a rather liberal definition of "great confidence". It obviously doesn't include due diligence.
As a result of these escapades, it was revealed that Temasek is estimated to have lost 40 percent, or an equivalent of $74 billion, of its portfolio due to exposure to the finance industry. Madam Ho announced last week that she was stepping down -- with no regrets -- as its chief executive.
In the meantime, Finance Minister Tharman Shanmugaratnam stuck his neck out and assured everyone that Temasek and the GIC had "assessed the proposals rigorously" before jumping in to make the investments, a statement he'll probably live to regret making.
I wonder if these rigorous assessments included looking at how both banks invested their funds. The latest revelation is that Citi, UBS, Merrill and Barclays had all invested in the Bernie Madoff scam. Mr Madoff ran the biggest Ponzi scheme in corporate history and duped his investors to part with nearly US$50 billion of their money. In fact UBS is being sued in France by a wealth management company for its involvement in the Madoff madness.
All this was happening at a time when investment guru Jim Rogers was warning that "I'm shorting investment banks on Wall Street...It grieves me to see what Singapore is doing. They are going to lose money."
Investing in the banks was, of course, part of Mr Lee's mega scheme to build Singapore up as a financial centre. Another part of the plan was to attract as many financial professionals to the country as possible: "We have drawn in many professionals, especially in financial services, which has expanded to its highest ever levels. Many financial institutions have moved their top people and their regional headquarters to Singapore to manage the wealth that is flowing from the Gulf oil states, the US, EU and Japan."
Translation: We have become a tax haven. And as the super-rich do their utmost to evade taxes by moving their monies to our shores, taxmen from the US and EU will follow their trail. Is providing a haven for tax cheats and turning a blind eye to tax crimes this Government's idea of sound economic strategy? What happens when the US and EU starts putting the squeeze on us? Are we really maximising our opportunities or merely masquerading our objectives?
Did you hear that boom?
"These initiatives have sparked off a boom in building around the Marina and Sentosa.” The MM was of course referring to the F1 Grand Prix that was held in Singapore last year and the controversial IR casinos that are being built.
The only boom we heard was the one in Las Vegas when the Sands Corporation imploded financially in 2008. Sands, headed by Mr Sheldon Adelson, was contracted to develop the Marina project. If Sands had gone bankrupt, Singapore's Marina would have been left in the lurch. The Singapore authorities quickly got in touch with Mr Adelson and, shortly thereafter, the gaming mogul miraculously raised $2 billion -- in a year gripped by financial crisis.
Analysts expect construction of Marina Sands to top US$6 billion (initially budgeted at $3.85 billion). In contrast Sands Macao casino cost $265 million to build and recouped its costs in less than a year. But that was in the boom years in 2004. Experts estimate that Marina Sands will have to earn more than US$1 billion a year just to remain viable. And this has to occur in the midst of a protracted period of an economic bust. Was this what Mr Lee meant by "maximising our opportunities”?
What about the F1 Grand Prix? The Government pumped in about $100 million to host the event in the hope that it would produce a kickback through increased tourism and sales. The result was that retail sales for September 2008 – the month that the race was held – dropped by 0.8 percent. The Singapore Retailers Association's executive director Lau Chuen Wei said: 'This is evidence that F1 did not bring with it the increase in business for the retail sector.”
Mr Lee also enthused in 2007 that "The whole Asian region is getting a lift-up. Singapore is at the junction between the two giants, China and India. We are well placed to benefit...”
Let's see, China is seeing its growth plummet to heart-stopping lows, companies are closing down by the thousands and, in the process, workers are being laid off in the millions -- 20 at last count. The Beijing government is seriously nervous about widespread social unrest.
India's economic expansion has come to a screeching halt. The country is reeling from double-digit inflation, foreign investment is drying up, the rupee is falling, and the stock market was down by as much as 40% last year.
These two countries desperately need fresh flows of capital and investments, without which businesses cannot continue to stay afloat, let alone service their debts. Collectively, China's companies have about US$2.4 trillion in debt repayments to consider.
And where are the funds going to come from? According to the MM, "There is high liquidity in the money supply of the US, EU and oil-producing countries. This accounts for the large in-flow of foreign money that has benefited the regional stock exchanges.” He could not have been more wrong. The following year the Institute of International Finance reported that the net capital flows from industrialised countries to emerging economies would trickle to a low of US$160 billion – plunging from the US$840 billion in 2007.
En bloc blocked
Over the last few years, a frenzy took over the property market. Seemingly rational people vandalised cars and property because they couldn't get their fellow homeowners to sign the collective agreements to sell their estates to developers who were willing to pay hundreds of millions of dollars for the en bloc purchases. Neighbour took neighbour to court and disputes erupted all over.
This prompted Mr Lee to comment in 2007 that "Demand for high end office and residential accommodation has increased. Many home owners who sold their condos in en bloc sales have received windfall gains. Some of them in turn are buying upper end HDB executive and 5-room flats, pushing up their values."
The bubble was dramatically inflated but everyone was too busy enbloc-ing to notice it. Then came 2008. The fourth quarter of last year saw property prices drop by a margin that was the biggest in a decade. More than 10,000 houses and apartments had to be sold under a deferred mortgage plan where buyers were allowed to postpone their loan payments until the properties were completed.
The frenzied rush to sell the condominiums vanished. Owners hoping to attract enbloc buyers had to reduce sale prices by as much as 40 percent in some cases. Developers who had hoped to re-develop their acquisitions are now stuck with their purchases because there is no demand for new homes. A senior manager at the ERA, a realty company, said: "These holding costs are tremendous, because projects like these, some of them are worth a few hundred million to maybe close to a billion dollars. So they would just have to perhaps rent them out to collect as much as they can in terms of rental." Some of the rental are going for as low as 50 percent of the usual rate.
"There was a big surge in demand for offices 10 or 11 months ago," explained CapitaLand Chief Executive Liew Mun Leong, "but it suddenly stops and falls off a cliff."
Now that the predictions that Mr Lee made in 2007 have gone up in smoke -- and together with it many billions of dollars -- what does the MM do?
First, roll out the Vintage Lee Act: Wag the finger at Singaporeans. "So this generation may believe that Singapore and Singaporeans will automatically go up the escalator every year. This is not so," Mr Lee told his audience at a Lunar New Year dinner last week. He forgot that he was the one who gushed that the golden period could go on for years.
Second, lay the blame on others: "People and systems tend to be carried away by exuberance. Investors get greedy and rush in to buy, believing that prices will only go up. When prices collapse, investors find they have lost huge sums." Of course, these are other people and other investors. Not him and his ministers who just got caught up in the system because "it is in the nature of the free markets of the western world that our economy is plugged into."
In 2007, it was he and his "competent and experienced team of ministers" who adopted "domestic policies to encourage growth." In 2009, it is the banks who "have lost confidence in themselves, in their fellow banks and other financial institutions, and even in their customers."
Third, pretend that there is no poverty in the country. "But nobody will be destitute, depending on soup kitchens or begging in the streets. Everyone has a home..." Mr Lee said to his audience, who were either too polite or too subservient to tell him to take a drive outside the Istana to HDB void decks.
Fourth, play the you-don't-know-how-lucky-you-are gambit. "My generation of Singaporeans will never forget the 1960s and early ‘70s..." he started off and then waxed nostalgic about Konfrontasi and shanty huts. It's another way of telling Singaporeans how good his party is.
In fact Mr Lee talked about everything regarding the present crisis except his role and the role of his ministers in the debacle. No mistakes were admitted, no errors conceded. If he had any tinge of regret about that "golden period" remark, he showed no sign of it.
In an age where accountability has become the touchstone of good government, the PAP continues to march remorselessly forward. (9 Feb 2009)