Merrill Lynch is in advanced talks to sell a $5 billion (£2.5 billion) stake to Singapore as the Wall Street firm seeks to boost its cash reserves in the face of expected losses of $16 billion on high-risk sub-prime mortgage investments this year.

The deal with the Singapore Government’s Temasek vehicle, which could yet fall apart, would be the first decisive move by John Thain since he took the helm of Merrill Lynch last month.

It comes after multibillion-dollar bailouts of rival banks, such as Citigroup, Morgan Stanley, Bear Stearns and UBS, by governments in Asia and the Middle East, as Wall Street banks reel from America’s mortgage meltdown.

It also highlights the rising influence of state-backed investment funds, or sovereign wealth funds, from export-rich countries that are taking advantage of the credit crisis to buy stakes in the West’s largest banks. There were reports last night that Saudi Arabia is planning to launch a $900 billion fund, the largest ever.

An arm of Saudi Arabia’s Government is thought to be the unnamed party behind part of a proposed $11.26 billion capital injection unveiled by UBS, the beleaguered Swiss bank, this week. Some shareholders are perturbed by UBS’s reluctance to identify the investor and are threatening to vote against the dilutive new issue at an emergency meeting in February.

Although details of the deal between Merrill Lynch and Temasek have yet to be finalised, analysts expect the agreement to be similar to other recent banking bailouts. This would see Merrill Lynch sell convertible bonds that can be swapped for a stake of 5 to 10 per cent of the group for about $5 billion.

A source at Merrill said the cash infusion was unlikely to be kept as a “purely passive investment”, suggesting that Temasek might back a potential sale of Merrill’s 49 per cent stake in BlackRock, an asset manager, if the bank’s capital reserves decline further. As well as the BlackRock stake, worth $12 billion, Merrill owns a fifth of Bloomberg, the financial data group, which could be worth $4 billion.

Merrill’s need for a cash injection has risen substantially this month as it became increasingly clear that the jump in sub-prime related investment writedowns recorded by many Wall Street firms in the third quarter will be at least as high in the fourth quarter and may continue well into next year.

Merrill declared its biggest quarterly loss, of $2.24 billion, in the third quarter as it took an $8.4 billion writedown that led to the ousting of Stan O’Neal as chief executive.

Securities backed by sub-prime mortgages are continuing to lose value as defaults on the underlying home loans keep rising and investors become increasingly wary of buying debt. At the same time, insurers that guarantee bond interest payments in the event of default on the underlying assets, face such high claims that they may not be able to finance all their claims.

— Lloyd Blankfein, chairman and chief executive of Goldman Sachs, has been awarded a $67.9 million bonus for 2007, according to documents filed late last night. The sum, which will be paid with $26.8 million of cash and $41.1 million worth of shares and options, sets a record on Wall Street, and makes him the world’s best-paid investment banker.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax