By David Cho
Washington Post Staff Writer
Wednesday, January 16, 2008
The nation's biggest financial firms, battered by huge losses in their mortgage businesses, are relying on an enigmatic source for cash: foreign governments in the Middle East and Asia.
Citigroup announced yesterday that it had sold a 7.8 percent stake in the company worth $14.5 billion to a group of investors, including the government of Singapore and Saudi Prince Alwaleed bin Talal, as it revealed a colossal $10 billion loss for the fourth quarter. Merrill Lynch, which is expected to report a massive loss tomorrow, said that it sold a special class of stock worth $6.6 billion to funds managed by South Korea and Kuwait.
This is the second time in recent months that the two banks have sought help from foreign government investment pools, known as sovereign wealth funds.
The worsening credit crunch in the United States has left domestic financial institutions with little choice but to seek help from foreign governments that have been enriched by the surge in the price of oil and the trade gap between the United States and Asia.
Once satisfied with holding safe bonds such as U.S. Treasurys, these countries now are stockpiling some of the largest investment funds in history and are looking for bargains in the ailing U.S. financial sector. In the past few months, sovereign wealth funds have invested more than $40 billion in Wall Street's biggest names, including UBS, Morgan Stanley and Bear Stearns.
The rapid rise of these funds represents a fundamental shift in financial power away from the United States, analysts and lawmakers say. And their growing clout is causing concern on Capitol Hill.
"As investments by sovereign wealth funds in American companies increase and the specter of control and undue influence by government entities looms, we have to be careful," said Sen. Charles E. Schumer (D-N.Y.), who chairs the Joint Economic Committee. "We should be keeping a watchful eye on these investments as they increase in size and scope."
A major issue for lawmakers is the transparency of these funds. Some, like Norway's, which has $350 billion, are upfront about their activities. Others, such as the Abu Dhabi Investment Authority's $875 billion fund, which is the world's largest, are more secretive.
Sovereign wealth funds recently have preferred to make passive investments that do not allow them to have any say in management decisions.
"They don't want to worry the markets," Simon Tse, a strategy analyst at Thomson Financial, said of sovereign wealth funds. "But you have to ask the question: 'What do they really want?' And that's the mystery behind these funds, we don't know who runs them."
Lawmakers reacted strongly against a Dubai firm that wanted to buy U.S. seaports in 2006 and a state-run Chinese firm that tried to take over a U.S. oil company in 2005. But since those incidents, sovereign wealth fund managers have become more savvy in their dealings with Congress by hiring lobbyists and by keeping their stakes low enough that they don't trigger reviews by regulators.
Little furor erupted last summer when Dubai paid $825 million for U.S. clothing retailer Barneys New York in June and followed with a 19.9 percent stake in the Nasdaq Stock Market.
Barney Frank (D-Mass.), who chairs the House Financial Services Committee, said that while there is potential for political "games to be played" by sovereign wealth funds, the greater concern is the economic weakness that has eroded the power of the U.S. banking system.
"The shift in power does not come from Singapore or Abu Dhabi investing in Wall Street, the shift comes from our economy screwing up," Frank said. "And the way we deal with this is not to say we aren't going to accept foreign investments but to fix what's wrong with our economy."
Richard C. Shelby (Ala.), ranking Republican on the Senate Banking Committee, has asked the Government Accountability Office to study the emergence of sovereign funds. "Senator Shelby recognizes the important role that foreign direct investment plays in the U.S. economy, and he welcomes such investment provided that it does not compromise our national security," said a Shelby aide, Jonathan Graffeo.
About two dozen countries have established sovereign wealth funds, including Libya, Iran, the United Arab Emirates and Australia. While precise data about these funds are difficult to obtain, most Wall Street analysts agree that their value worldwide has reached about $2 trillion and is likely to grow at least fivefold by 2012.
Notable funds include Norway's, which is viewed as a model of transparency and governance. Its managers have been actively advising several nations, including East Timor, Bolivia, Nigeria and Russia, which are starting funds. The Kuwait Investment Authority, a longtime investor in Chrysler, and the Abu Dhabi Investment Authority are also respected for their acumen and size.
China's source of money is its trade surplus with the United States and other countries. In the past, China poured much of its surplus, estimated at $1.3 trillion, into U.S. Treasurys. Now it is seeking higher returns and a more diversified investment strategy. On Sept. 29, it took $200 billion from its surplus and launched a sovereign wealth fund. One of the fund's first moves was to invest $3 billion into one of Wall Street's biggest names, private-equity giant Blackstone.
Sovereign funds' activity has demonstrated that they are primarily focused on maximizing profit, Frank said. They are not investing in the United States as "a goodwill gesture, but they are not doing it as foreign policy either -- they are doing it to make money," he said.