Gov't spending may be big gamble

Singapore prefers to call them “integrated resorts.” Gambling is what it is, though. Welcoming Las Vegas tycoons Sheldon Adelson and Steve Wynn is intended to woo tourists and diversify the economy.

It's not exactly a new idea. The truth is that Singapore has been gambling for some time now, and not very well.

The die was cast when the Government of Singapore Investment Corp., which manages more than US$100 billion of state currency reserves, bet big on Zurich-based UBS AG. It took three days to agree to prop up debt-laden UBS in 2007. It may take 10 years to recoup that US$10 billion.

Singapore isn't alone in massive losses that may reshape markets — and perhaps for the better.

Two years ago, sovereign wealth funds were heralded as saviors of world markets. That was when Lehman Brothers Holdings Inc. seemed too big to fail. It was a quainter time, when Iceland was a country, not a failed hedge fund, and American-style capitalism still had some appeal.

The thinking then was that the trillions of dollars that resource- and cash-rich governments were pouring into markets would out-Greenspan the “Greenspan put.”

Former Federal Reserve Chairman Alan Greenspan liked to rescue markets with lower rates when things got dicey. Likewise, investors figured this almost infinite source of demand would support riskier assets and stabilize markets. Capitalism suddenly seemed safe for all gamblers.

Markets had a new shock absorber and it appeared to work brilliantly. As the global crisis heated up and banks shuddered, government investment arms helped support Citigroup Inc., Merrill Lynch & Co. and UBS, as well as Barclays Plc, Credit Suisse Group AG and Morgan Stanley.

Then the roof fell in. Investments totaling more than US$69 billion by state investment funds produced US$20 billion in realized and paper losses, according to data compiled by Bloomberg. Blowing that much money means managers of these funds will be under greater scrutiny than ever.

China Investment Corp. is the big money in this tale, since China has US$2.4 trillion of reserves. It still has explaining to do over a US$3 billion investment in Blackstone Group LP in 2007. Blackstone shares have fallen 52 percent since Jan. 1, 2008.

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