SWFs Not Seeking (Ineligible) Wall Street Firms

♠ Posted by Emmanuel in at 3/18/2008 04:55:00 AM
There was a big hullabaloo about sovereign wealth funds (SWFs) late last year when they were busy buying shares in Wall Street firms that needed to bolster their capital after subprime-related losses. Voluble CNBC commentator Jim Cramer famously remarked about them, "Do we want the communists to own the banks, or the terrorists? I’ll take any of it, I guess, because we’re so desperate.” Well, Mr. Cramer, it seems that even sovereign wealth funds (AKA the "communists" and the "terrorists") are not rushing in to save the latest damsels in distress, Bear Stearns, Lehman Brothers, and heaven knows who else. As SWFs who bought shares in Wall Street firms in late 2007 are getting burned as share prices of these firms drop, SWFs are learning about investing the hard way. Why "invest" in America if its currency keeps plunging and its banks keep going under? The US is today's economic basket case. From Reuters:

One group conspicuously absent from a last-minute deal to scoop up Bear Stearns on the cheap were the sovereign wealth funds that have recently spent billions of dollars on Wall Street. Given the hundreds of billions of dollars these state-backed funds control, that is bad news for Western firms or any other company hit by the credit crunch that is tightening its grip on the United States and Europe.

The funds look to have steered clear of the deal to rescue the fifth-largest U.S. investment bank, which JPMorgan Chase & Co. agreed to buy for just $2 a share on Sunday -- or one-fifteenth of Bear's stock price on Friday.

With no money coming from the Middle East or Asia in the latest deal for a struggling Wall Street bank, analysts said on Monday that sovereign funds are likely to keep away from U.S. financial assets for now.

"We are digesting all the information that is pouring out of the U.S.," said Chairman Sultan bin Sulayem, whose state-owned Dubai World owns 6.6 percent of casino operator MGM Mirage. Asked if he would invest in the United States now, he said: "I don't know."

Qatar's prime minister, who heads the country's $60 billion sovereign wealth fund, told Reuters last month he would rather invest in European over U.S. lenders because U.S. bank stocks were likely to fall further on subprime-mortgage writedowns.

Dubai International Capital, an investment agency owned by the ruler of Dubai, made similar noises about avoiding the United States for the moment, adding that it was going to take a "lot more money" than the minimum $5 billion the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal agreed to invest in Citigroup Inc (C.N: Quote, Profile, Research) to rescue the ailing lender.

And it's not just the big funds shying away from Wall Street. Shares in China's top broker, CITIC Securities, surged on Monday, driven in part by the firm distancing itself from a deal reached last year to invest in Bear Stearns.

As the funds and foreign investors stay away, there could be little comfort for Wall Street workers hoping a foreign investor will help them keep their jobs. "There's no way anybody's going to catch a falling knife. Why come in now?" asked Craig Russell, Beijing-based chief market strategist at Saxo Bank. "There's no one in the market place willing to re-establish confidence apart from the Fed, and that scares everyone. The U.S. dollar is the hot potato."

When Wall Street banks fell under the weight of exposure to sub-prime mortgage assets last year, sovereign wealth funds propped them up with huge cash injections. Since late November, Citigroup has raised about $30 billion of capital from Abu Dhabi, Kuwait and Prince Alwaleed, with its shares down roughly 38 percent in that period. Swiss bank UBS has seen its shares tumble since Singapore and the Middle East injected cash in December.

That same month, China's new investment fund agreed to pump $5 billion into Morgan Stanley after the U.S. investment bank posted $9.4 billion of losses in subprime mortgages and other assets. The bank's shares have since fallen 25 percent.

Financial shares have dropped as the credit crunch has deepened. The value of the U.S. dollar has fallen along with them. "Based on their earlier experience, sovereign wealth funds are going to be more hesitant," said Bill Belchere, regional economist at Macquarie Securities. "This would call for some diversification away from the U.S. dollar."

Belchere said Middle East sovereign funds are expected to diversify more across Asia. Hong Kong bankers say funds have indeed been running a slide rule over potential deals in the natural resources and financial sectors in China.

With sovereign wealth funds out of Wall Street's headlights for now, that spells trouble for employees hoping to keep their jobs at credit-hit institutions. Massive layoffs across Wall Street have been largely averted so far, as the capital injections took the form of minor stakes from foreign fund investors.

But if stricken financial institutions are forced to turn to fellow industry players for a bail-out, job overlap is inevitable. As it stands, JPMorgan has a large and successful investment banking franchise, leaving in doubt the future of Bear Stearns' own unit.

China has also seen its stake in Blackstone Group cut in half since the private equity firm went public in June. Still, there may be some light at the end of the tunnel. Gulf sovereign wealth funds have stepped in before and, though they were not involved in Bear Stearns, they may do so again.

"They are keen to be seen to play an a responsible role in the global economy, and this is a region of surplus funds," said Marios Maratheftis, Middle East economist for Standard Chartered Plc in Dubai. "It's in no one's interest, including here in the Gulf, for the U.S. to go into deep recession."

Bloomberg columnist Andy Mukherjee also weighs in about these SWFs facing questions about their dwindling investments in US banks:

Sovereign wealth funds are long-term investors. They can afford to be patient. But that doesn't mean they have a complete license to bungle their trades in the short- to medium-term.

If there's still such a thing as ``fundamental value'' of a U.S. financial company, post-Bear Stearns no one can claim to know just what it is. “Bear Stearns's demise should probably be viewed as the first of many,'' Richard Bernstein, chief investment strategist at Merrill Lynch, wrote in a report yesterday.

Comments like those will make sovereign wealth funds in Asia and the Middle East cringe. No doubt they will now be extra- cautious about investing in U.S. financial stocks. But what about the billions of dollars they have already committed?

The fate of those investments is now in the domain of luck and prayers. The fund managers can only hope they haven't bitten off more risk than their political masters can chew.