Published February 12, 2009

COMMENTARY
Don't paper over cracks with paper losses

It's time to review what caused them and ascertain what needs fixing

By WONG WEI KONG
ASSOCIATE NEWS EDITOR
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PAPER losses are not real losses - but it can be argued that the two are really just different sides of the same coin.

And there could be danger in taking too sanguine a view of paper losses, and seeing them as something of less concern than real losses.

Let's put it this way: the one meaningful difference between a paper loss and a real or realised loss is holding power, or the ability of an investor to sit out the loss against another's need to sell and thereby realise the loss.

All the factors leading to the loss, whether paper or real, are similar, such as wrong calls, misplaced assumptions, unfortunate timing or bad advice.

Tuesday's revelation of the performance of Temasek Holdings provides a study on paper losses.

The global financial meltdown cost the Singapore investment company a $58 billion loss in eight months, the government said. Temasek's net portfolio value fell 31 per cent from $185 billion on March 31, 2008 to $127 billion on Nov 30, 2008.

The loss is on paper, it was stressed, and the government said it had full confidence in Temasek as well as the Government of Singapore Investment Corp (GIC) to ride out the market downturn as long-term investors and produce solid returns over time.



What can be said about this? For one thing, it is a paper loss because Temasek has a holding power that is the envy of most fund managers. Second, given its very longterm horizon, it is improbable that any of these losses will be realised (indeed, they could turn to gains). But all that should not prevent a review of what led to the losses.

To be fair, the drop in Temasek's net portfolio value was less than the fall in some regional equity indices (the MSCI Singapore index lost 44 per cent and MSCI Asia ex-Japan shed 45 per cent over the same period).

Still, there's nothing to stop Temasek from outperforming the rest of the market by a bigger margin or to book a much smaller loss (or even gain) - which is what Singapore Airlines did, by booking a hedging gain amid steep losses within the industry.

Too often, paper losses are used to soften the blow of investments that have not gone according to plan. But in the real world, paper losses do have consequences.

Take listed companies. A lot of the losses or weaker earnings being announced by companies are down to fair-value adjustments, with accounting rules requiring firms to mark down the value of their investments or assets even if they have not realised the losses - in other words, paper losses. But the market still treats these as bottomline results, and the fact that these are paper losses does not save the companies from being punished by investors.

It's the same for individuals. An investor who had borrowed to buy shares would be asked to top up the balance if he suffers paper losses of a certain extent, even if he does not realise the loss. A homeowner will also be asked to top up, if the value of his property drops by a certain extent from the original valuation, even if it's all on paper. The concept of negative equity and accounting for it, in fact, hinges on the treatment of paper losses as potential actual losses.

So there are realities to paper losses.

Back to Temasek: It's highly likely, given the nature of its mandate and its long-term view, that the damage to its portfolio will remain "just" paper losses. Yet, the extent of the paper loss - a shock to many Singaporeans - should still lead to a closer examination or a rethink of the way Temasek operates and invests. If all's fine, and only the markets are to be blamed, so much the better. If some adjustments are needed, now is as good a time as any to begin that process.