Financial Times
12 Aug 2008
By John Plender
"Further questions arise on Merrill’s recent capital raising. Temasek, the Singaporean sovereign wealth fund that participated in two earlier fund raising operations, insisted on a reset clause to provide protection if Merrill issued new stock within 12 months at a lower price than on the previous occasion. The re-set clause turned into a bill for a whopping $2.5bn.
This must give regulators pause for thought, since Temasek was putting up an unusual form of capital that fell short of being true equity. Fortunately for Merrill the Singaporean investor was prepared to plough the $2.5bn back in fresh capital and to do so without insurance against a further share price decline. But if this practice becomes more commonplace, and in the absence of a contractual obligation to plough any compensation back, a very toxic form of limited-risk capital would have the potential to wreck bank balance sheets."
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