At a recent finance conference in Brussels, Citigroup chairman Win Bischoff had a very interesting exchange with a German EU parliamentarian (Martketwatch):
“It is the China and Russia syndrome of sovereign wealth funds that is most concerning,” Bischoff told a finance conference in Brussels.
China and Russia are the main concern in the debate over whether to regulate state-backed investments, German member of the European parliament Wolf Klinz said. He said German companies are worried that China will steal its intellectual property and fear that Russian President Vladimir Putin wants to use investments “as a political instrument.”
“Yes, that’s a very good point,” Bischoff said, nodding at Klinz’s remarks.
Bischoff’s comments are particularly interesting because his firm has recently had several SWF investments approved by the Committee on Foreign Investment in the United States (CFIUS). I would imagine that he is familiar with what the US government’s main concerns have been with SWF investments.
Qatar likely to buy 5% stake in Credit Suisse worth $3 billion
The deal hasn’t been finalized and the stake could be slightly higher or lower. The interesting part of this deal is that Credit Suisse is not publicly recognized as having large subprime related losses, like all the other banks that recently received SWF capital infusions (Marketwatch):
Other than a $1.9 billion writedown related to the sub-prime crisis announced in November, the bank has so far emerged comparatively unscathed from the credit crunch. Sovereign wealth funds from Abu Dhabi, China, Dubai, Singapore and Kuwait have snapped up large stakes in banks such as Citigroup, Merrill Lynch, Morgan Stanley and UBS as they wilted under the weight of huge losses related to the implosion of the U.S. sub-prime mortgage industry.
While Sovereign Wealth Funds (SWF) owned by big Asian economies invest in assets the world over, Indian policymakers too are looking at whether the country needs to float such a fund. The finance ministry is planning to set up a committee to examine the pros and cons of an Indian sovereign wealth fund.
I’m not sure how much fiscal sense a SWF makes for India. The country is far less developed (infrastructure, education, basic health care, etc) than China and other export-oriented countries with SWFs, doesn’t have an abundance of natural resources, and is a democracy which means the government would likely be held accountable for the fund’s performance. How would the Indian government react to the public backlash from an investment gone bad a la the China Investment Corp/Blackstone deal?
More than a third of India’s population lives in poverty, while in China the percentage of the population living below the poverty line has fallen into the single digits; in absolute terms this is a difference of several hundred million people. How would the Indian government react to hundreds of millions taking to the streets and protesting a government that, from their point of view, is neglecting their dire condition to bailout a foreign investment bank? I just can’t see how there wouldn’t be an immediate change of policy if this type of situation arose in any democratic country, let alone poverty stricken India.
GCC dollar peg, inflation update
Qatar is considering following in Kuwait’s footsteps and dropping the dollar peg (Financial Times):
Qatar is reviewing its currency policy and could revalue or drop the dollar peg as the booming Gulf state struggles to tame inflation while the US reduces interest rates to head off a recession. Qatari officials on Wednesday said the gas-rich emirate was considering revaluing its currency or linking it to a trade-weighted basket of currencies as well as other policy proposals aimed at cooling rampant inflation of up to 15 per cent.
More than half of Gulf businesses have been badly hit by rising inflation, with costs increasing faster than they can be passed on to customers, an ArabianBusiness.com survey has revealed. With inflation rising across the GCC, and predicted to hit a 20-year high of 12% in the UAE this year, 62.5% of respondents to the poll said the price of goods was rising too fast to be passed on.
US backlash to recent investments by sovereign wealth funds
Citigroup and Merrill Lynch are viewed more negatively by the American public on the heels of investments each firm accepted from SWFs (Financial Times):
Citigroup and Merrill Lynch’s standing among US citizens has plummeted as a result of multi-billion dollar capital injections by sovereign wealth funds, according to new research that highlights simmering public opposition to investments by foreign governments.
Over half of the 1,000 people polled by the market research group Strategy One said they “trusted Citigroup less” after its recent decision to tap Middle Eastern and Asian sovereign funds to ease its financial constraints.
In Merrill’s case, 45 per cent of the respondents said their trust in the bank had fallen since hearing of investments from foreign state funds, according to the research to be published on Tuesday.
The new research – carried out early this month between the two waves of foreign investments in Citigroup and Merrill – also points to an underlying current of protectionism within the US public, which could be exacerbated by the rising threat of a recession.
“The Citigroup figure is staggering,” said Laurence Evans, president of Strategy One, which is owned by the public relations group Edelman.
“There is a xenophobic element to it. The biggest concern is uncertainty: people don’t know how much influence sovereign wealth funds will have.”
Gulf response to US rate cut
Gulf central banks, whose currencies are pegged to the US dollar, have decided to follow the US Federal Reserve’s 75 basis point interest rate cut with reductions of their own (Arabian Business News):
“The Gulf will have to match the Fed cut,” said Marios Maratheftis, regional head of research at Standard Chartered Bank. “This is going to create even more liquidity in the market which means more inflationary pressures.” Inflation in four of the six Gulf Arab oil producers has overtaken official lending rates, encouraging borrowing for investment in assets such as real estate, which is the main driver of the surging cost of living across the region.
Gulf Cooperation Council (GCC) central banks say that they remain committed to the dollar peg for now, but will leave the door open for coordinated currency revaluations in the future, to tackle rising inflation.
China in no hurry to buy credit crunch bargains
China is taking a more cautious approach to making investments on the belief that the worst of the subprime crisis is still yet to come (Reuters):
Beijing’s reluctance to buy into Citigroup coincides with growing expressions of concern by Chinese officials about the seriousness of the credit crisis. “The subprime loan issue has planted a ticking timebomb in the global financial markets. It now seems the impact is much more serious than the market had previously expected. I don’t think it will be over any time soon,” Vice-Finance Minister Li Yong said at a recent forum.
Abu Dhabi announces $15 billion clean energy fund, world’s first carbon neutral city
Abu Dhabi decides to invest in the energy technologies of the future (BBC):
The government of Abu Dhabi has announced a $15bn initiative to develop clean energy technologies. The Gulf state describes the five-year initiative as “the most ambitious sustainability project ever launched by a government:”. Components will include the world’s largest hydrogen power plant. The government has also announced plans for a “sustainable city”, housing about 50,000 people, that will produce no greenhouse gases and contain no cars.
As someone who has worked in the structured finance industry, I must say that he is not too far off on some of the things he says about the bond insurers and rating agencies.
Enrich made an interesting comment about emails that he receives after writing articles about SWFs investing in US corporations. He says that many people complain about the US “selling out to foreigners” and “needing to learn Chinese and Arabic in the next ten years”. Thomas followed up by saying that there’s a xenophobic element in that type of criticism and the US isn’t as global as it thinks it is, especially when compared to places like London, Hong Kong, and Singapore. Hillary Clinton’s pandering at the last Democratic debate certainly speaks to these points.
The story gives a good overview of many of the basics such as size of SWFs, how they came about, how they’ve evolved, where they’re headed, and the issues facing SWF investing. It also includes a relatively balanced discussion on the motives of SWFs, which isn’t surprising as The Economist is probably the most fair and balanced mainstream publication around.
One point that The Economist makes, that has been completely absent from the mainstream debate thus far, is that the fear of politicizing foreign investments cuts both ways. The SWFs must be cognizant of possible retaliatory actions, such as asset freezes and/or asset confiscations, that can be taken against their investments for things such as political disagreements or court rulings that hold SWFs responsible for the actions of their host country’s citizens. The Economist cites the example of Britain forcing the Kuwait Investment Authority to divest from part of its’ stake in BP in the 1980s because Margaret Thatcher, in the midst of privatizing national assets, ‘was in no mood to see so much of a national treasure owned by a foreign government’.
Politicians scrutinizing the recent flurry of SWF investments should take care to remember that these infusions are in effect rescue capital that their government’s would likely be on the hook for had SWFs been deterred from investing, and that their own future geopolitical motives should be held to the same standard they want to hold SWFs to.
The article concludes, correctly in my opinion, by saying the chief threat that SWFs pose is that of financial protectionism and that it’s in the best interests of all parties to get along:
The hope is that both host countries and sovereign-wealth funds see that their interest lies in building confidence. The hosts stand to benefit from the funds’ capital. Meanwhile the funds are ruled by the politics of the places where they invest. You are only sovereign at home; abroad, someone else wields the power.
During Tuesday’s Democratic presidential debate forum in Nevada, Brian Williams of NBC interjected the issue of sovereign wealth funds investing in the US economy into the debate when he directed the following question to Hillary Clinton (Full transcript):
BRIAN WILLIAMS: This evening on NBC Nightly News, our lead story was about the fact that Citigroup and Merrill Lynch have both gone overseas, as some put it hat in hand, looking for $20 billion in investment to stay afloat from, among other things, the government of Singapore, Korea, Japan, and the Saudi Prince al-Waleed, the man — Rudolph Giuliani turned his money back after 9/11.
This is — strikes a lot of Americans as just plain wrong. At the end of our report, we said this may end up in Congress. What can be done? And does this strike you as fundamentally wrong, that much foreign ownership of these American flagship brands?
This is a textbook example of a loaded question and Hillary, never one to shy away from an opportunity to pander, didn’t disappoint with her answer:
SEN. CLINTON: Brian, I’m very concerned about this. You know, about a month and a half or so ago, I raised this concern because these are called sovereign wealth funds. They are huge pools of money, largely because of oil and economic growth in Asia. And these funds are controlled often by governmental entities or individuals who are closely connected to the governments in these countries.
I think we’ve got to know more about them. They need to be more transparent. We need to have a lot more control over what they do and how they do it. I’d like to see the World Bank and the International Monetary Fund begin to impose these rules. And I want the United States Congress and the Federal Reserve Board to ask these tough questions.
I get Hillary’s overall political strategy and I understand that her statements during the campaign mean essentially nothing given her record of not saying anything substantive without extensive polling and focus group data. I even think her strategy is ultimately going to work. However, the problem with this approach to policymaking is that your agenda is going to be influenced by public sentiment rather than what’s right for the country. It’s sheer lunacy to take advice on international trade from the Americanpublic. If politicians want to deter foreign investment the least they can do is tell Citi, Merrill, Morgan Stanley, and all the other cash strapped companies where they can go to get financing, if SWFs are off limits.
The issue of SWF motive and intent deserves a much deeper look (which I am planning on doing in the near future) but in a nutshell the track record of sovereign investors very clearly demonstrates that their investment objectives have been the same as those of large pension and mutual funds. Government-sponsored investors in Asia and the Middle East have been among the largest holders of US government debt for several decades. These holdings have given them ample opportunity to do sinister things and cause substantial harm to US economic and geopolitical interests. The fact that they haven’t demonstrates what their true intents are; getting a good return on investment.
It’s important to note that Hillary’s logic would also apply to preventing and/or limiting foreigners from buying US government debt and US dollars. That would be a very, very bad thing. Again, this issue is much more complex and has many more layers that I will be exploring in greater depth very soon.
Back to the debate. Barack Obama gave a much more thorough and well-thought out answer to the question, even acknowledging that SWFs are bailing out the US banking industry. He also comments on one of the root causes of America’s current economic difficulties (dependency on foreign, fossil-based fuel):
SEN. OBAMA: Well, it’s not a rebuttal. I just want to pick up on a couple things that have been said.
Number one, part of the reason that Kuwait and others are able to come in and purchase, or at least bail out, some of our financial institutions is because we don’t have an energy policy. And we are sending close to a billion dollars a day.
And this administration has consistently failed to put forward a realistic plan that is going to reduce our dependence on foreign oil, is going to invest in solar and wind and biodiesel. You look at a state like Nevada. One thing I note is folks have got a lot of sun here, and yet we have not seen any serious effort on the part of this administration to spur on the use of alternative fuels, raise fuel efficiency standards on cars. That would make a substantial difference in our balance of payments, and that would make a substantial difference in terms of their capacity to purchase our assets.
And the second thing I just want to point out is that the — the sub-prime lending mess, part of the reason it happened was because we had an administration that does not believe in any kind of oversight. And we had the mortgage industry spending $185 million on lobbying to prevent provisions such as the ones that I proposed over a year ago that would say, you know, you’ve got to disclose properly what kinds of loans you’re giving to people on mortgages. You’ve got to disclose if you’ve got a teaser rate and suddenly their mortgage payments are going to jack up and they can’t pay for them.
And one of the things that I intend to do as president of the United States is restore a sense of accountability and regulatory oversight over the financial markets. We have the best financial markets in the world, but only if they are transparent and accountable and people trust them. And increasingly, we have not had those structures in place.
For what it’s worth, his understanding of the subprime crisis is much more nuanced than Hillary’s (Wall St made bad bets)……or is Hillary just pandering to the lowest common denominator again by bashing Wall St?
2007 was the year sovereign wealth funds put themselves on the map. In order to understand the evolution of SWFs, it’s obligatory to take a critical look at some of the landmark events of that important year. Expect to see more 2007 reviews, commentaries, and analytical pieces in the comings weeks. To kick things off, a review of the most newsworthy SWF deals of 2007:
Dec. 24, 2007: Merrill Lynch says it will sell a stake in itself of at least $4.4 billion, and up to $5 billion, to Singapore’s state-run Temasek Holdings. Temasek will hold less than 10 percent of Merrill and have no voting control. Merrill also agreed to sell a $1.2 billion stake to domestic investors
Dec. 10, 2007: UBS AG announces that the Government of Singapore Investment Corp., a sovereign-wealth fund, is investing $9.75 billion for a 9 percent stake in the Swiss banking giant, while an undisclosed strategic investor in the Middle East is contributing $1.77 billion in UBS AG.
Nov. 26, 2007: Abu Dhabi Investment Authority, the sovereign investment fund of the Gulf Arab state, acquires a 4.9 percent stake in Citigroup Inc., the largest U.S. bank, for $7.5 billion.
Nov. 7, 2007: Central Huijin Investment Co., China’s largest state-owned investment arm, acquires 71 percent of China’s joint-stock China Everbright Bank for $2.7 billion.
Oct. 29, 2007: Dubai International Capital, owned by Dubai-ruler Sheikh Mohammed bin Rashid Al Maktoum, acquires 9.9 percent outstanding equity stake in Och-Ziff Capital Management Group, a U.S.-based hedge fund, for more than $1.1 billion. Och-Ziff goes public in November on the New York Stock Exchange.
Oct. 22, 2007: China’s government-controlled Citic Securities Co. and U.S. investment bank Bear Stearns Cos. agree to invest $1 billion in each other for minority stakes that could be expanded. They will also operate a 50-50 joint venture in Hong Kong to offer capital markets services across Asia.
Sept. 20, 2007: The Qatar Investment Authority, Qatar’s sovereign investment fund, acquires a 20 percent stake in the London Stock Exchange and nearly 10 percent of Nordic bourse operator OMX AB.
Sept. 20, 2007: Abu Dhabi-based Mubadala Development Co., an investment arm of the Abu Dhabi government, buys a 7.5 percent stake of the management operations of one of the world’s largest private-equity firms, Carlyle Group, for $1.35 billion
July 23, 2007: China Development Bank, a Chinese state agency, agrees to pay $3 billion for a 3.1 percent stake in British bank Barclays PLC, and Temasek Holdings, a sovereign wealth fund in Singapore, agrees to pay $2 billion for a 1.77 percent stake in Barclays.
July 13, 2007: Dubai International Capital purchases a 2.87 percent stake in one of India’s largest banks, ICICI Bank Ltd., for $750 million.
May 20, 2007: China’s state investment company agrees to pay $3 billion for a 10 percent stake in U.S. private equity firm Blackstone Group LP. The Chinese investment company agreed to buy nonvoting shares in Blackstone concurrent with Blackstone’s initial public offering.
May 2, 2007: Dubai International Capital buys a undisclosed stake in British bank HSBC Holdings PLC.
Citigroup announced that it will be accepting investments totaling $14.5 billion from the Government of Singapore Investment Corporation, the Kuwait Investment Authority, one of it’s largest current shareholders Prince Alwaleed bin Talal, former CEO Sandy Weill, and the New Jersey Investment Division. Merrill Lynch will raise a total of $6.6 billion from the Korean Investment Corporation, the Kuwait Investment Authority, and Mizuho Corporate Bank of Japan (Financial Times).
For Citigroup, the announcement of the capital infusion coincided with the release of a disastrous 4th quarter earnings report and the revelation that things could get worse:
Citigroup also unnerved investors by warning of losses to come from consumer loans as it revealed a 40 per cent dividend cut, a $9.83bn fourth-quarter loss, $18bn in subprime-related credit writedowns and remaining exposure of $37bn to subprime mortgages.
Tomorrow, Merrill Lynch is expected to report a substantial loss and a possible subprime related writedown of $15 billion (Reuters):
Citigroup expects a $15 billion fourth-quarter write-down at Merrill Lynch and said CDO/subprime exposures will decline by 50 percent to 70 percent in aggregate.
Subprime Damage Report
The capital infusions that Citi and Merrill just received bring the total amount invested in banks and securities firms by outsiders (primarily SWFs) since the subprime crisis began last summer to $59.4 billion:
The countries of the GCC could revalue their currencies, which are currently pegged to the dollar, by April (Arabian Business News):
Gulf Arab oil producers could revalue their currencies together if the US dollar weakens further, with appreciations of 8% in the UAE dirham and Saudi riyal likely before April, Standard Chartered said on Wednesday.
Dollar pegs force the region to shadow US interest rates at a time when the Federal Reserve is cutting rates to contain a credt crisis and inflation is running at decade highs across the Gulf.
