Temasek Holdings is one of Singapore's sovereign wealth funds (SWFs), managing $130 billion. Over the past few years, the fund has been diversifying into emerging markets as well as developed economies.

In fact, Temasek was one of the early investors in some major U.S. financial institutions. It has invested $5 billion in Merrill Lynch (NYSE: MER) back in December.

While Temasek hasn't tracked well, SWFs focus on the long term. Temasek still appears to be bullish on U.S. financial services companies as the portfolio concentration is a whopping 40%. And there are even rumors that Temasek may invest in Lehman Brothers (NYSE: LEH).

According to its annual report, Tamasek reported a $12.8 billion net profit for the past year as of the end of March. Keep in mind that the fund has engaged in a variety of asset sales.

Going forward, Tamasek is glum on its forecast, though. Basically, the fund thinks that the credit crunch will last another two years – which is certainly depressing.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

Reuters reports that Merrill Lynch (NYSE: MER) is taking an enormous $5.7 billion write-down on losses from mortgage-backed securities (MBSs) and plans to raise $8.5 billion.

The biggest shocker was, as Reuters reports, that Merrill signed a contract with Singapore's Temasek, a sovereign wealth fund, that requires Merrill to pay $2.5 billion under terms of a previous stock sale to Temasek, along with $2.4 billion in required dividends to preferred shareholders. That's because under its previous deal, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors. Temasek has agreed to purchase $3.4 billion -- or 28% of the new offering. In other words, Merrill is paying an extremely high price for its capital.

The second shocker was how much of a write-down Merrill is taking on its portfolio of collateralized debt obligations (CDOs). Private equity fund Lone Star is paying 22 cents on the dollar, or $6.7 billion for CDOs with a stated book value of $30.6 billion. At that rate, the holders of $2 trillion worth of CDOs outstanding earlier this year would need to take a $1.56 trillion haircut if they sold all the CDOs. And I don't think they have nearly enough capital to be able to afford that.

Merrill Lynch (NYSE: MER) -

Merrill announced on December 24 it was enhancing its capital position by up to $7.5 billion with agreements to raise up to $6.2 billion through newly issued common stock with Temasek Holdings and Davis Selected Advisors and the sale of ML Capital to GE Capital.

Smith Barney says: "We expect that this is just the beginning of management's actions to sell non-core operations, and we expect these sales will be accretive to ROE."

MER overall option implied volatility of 45 is above its 26-week average of 38 according to Track Data, suggesting larger risk.

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

The Associated Press reports that Merrill Lynch & Co. (NYSE: MER) is in talks to accept a $5 billion investment from Singapore's Temasek Holdings. This is the latest in a string of investments from Asian and Middle Eastern government funds -- called Sovereign Wealth Funds (SWFs) -- which oversee between $2 trillion and $15 trillion.

Of the countries that are buying up big chunks of our financial system, Singapore is among the least threatening. I have visited there several times and find it a beautiful country. However, it has some puritanical social policies -- such as prohibiting people from chewing gum -- a ban it relaxed in 2002. I doubt its investment in Merrill will lead Singapore to impose its gum chewing ban on the U.S..

Merrill is soon to announce additional write-downs of assets thanks to the ratings downgrade of bond insurer ACA Financial Guarantee Holdings. One estimate suggested Merrill would write down $3 billion because ACA's lack of capital transfers the cost of bad Collateralized Debt Obligation (CDO) investments from ACA to Merrill.

But who knows? There's no reason to think we've reached the bottom -- of either the asset write-downs or the SWF buy-up of our banking system.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Merrill Lynch securities.

MAJOR PAPERS:

• Merrill Lynch & Co Inc (NYSE: MER), under intense pressure from billions of dollars of mortgage write-downs may get about a $5B capital investment from Temasek Holdings, a Singapore state-owned investment firm, the Wall Street Journal reported.
• The WSJ also reported that the SEC is investigating how Washington Mutual Incorporated (NYSE: WM) handled and reported on mortgage loans which may have been based on inflated home appraisals.

WEB SITES:

• BusinessWeek's "Inside Wall Street," Eastman Kodak Company (NYSE: EK) is looking to transform from a pariah on the Street into success. The number one photography company has been restructuring since 2003, and analysts expect to see strong profitability and cash flow in 2008.
• Aldabra 2 Acquisition Corp (AMEX: AII) may be another success story, BusinessWeek's "Inside Wall Street" noted, particularly if it gets a boost in output and "possible listing on the Big Board."
• Analysts are bullish on Inspire Pharmaceuticals Inc (NASDAQ: ISPH), BusinessWeek's "Inside Wall Street" reported, which has conjunctivitis drug AzaSite on the market and several drugs in its pipeline. AzaSite sales are expected to come in around $45M next year, but the company could grow further with its cystic fibrosis drug Denufosol, now in phase III trials.

Merrill Lynch (NYSE: MER) may be worse off than expected. A report in The Wall Street Journal says that the sovereign fund of Singapore, Temasek Holdings, may put $5 billion into the investment bank. The news would be an indication that Merrill is facing huge losses in the last quarter of the year.

The price action in companies like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) has been bad the last two days. Credit agencies have indicated that there may be more financial company downgrades and bond insurance firms may lose the ratings levels that have made them such useful backstops.

The question now is not whether Merrill and its peers will need more investment capital. It is whether the process will repeat itself once or twice more next year if the mortgage market gets substantially worse.

Douglas A. McIntyre is an editor at 247wallst.com.