U.S. Mortgaging Its Future for Sovereign Fund Investments

Hard hit by multi-billion dollar losses tied to the collapse of the housing market, U.S. financial giants are selling their souls -- they call them stakes -- to China, Abu Dhabi and other foreign governments.

Sovereign wealth funds, which control as much as $2.5 trillion (yes, TRILLION) in investments worldwide, have provided much-needed cash injections to Citigroup (C), Merrill Lynch (MER), Bear Stearns (BSC) and others (See following chart). But these stakeholders are interested in more than profits.

Foreign buying power

Date	U.S. Company	Govt. controlled fund	Stake	Price
5/28/07	Blackstone Group	China	10%	$3 billion
9/19/2007	Nasdaq	Dubai - Borse Dubai	19.90%	$1.8 billion
9/20/07	Carlyle Group	Abu Dhabi - Mubabala Development Co.	7.50%	$1.35 billion
10/22/07	Bear Stearns	China - Citic Securities	N/A	$1 billion
10/29/07	Och Ziff Capital	Dubai - Dubai Int'l Capital	N/A	$1.29 billion
11/16/07	AMD	Abu Dhabi - Mubabala Development Co.	8%	$622 million
11/26/07	Citigroup	Abu Dhabi - Abu Dhabi Investment Auth.	4.90%	$7.5 billion
12/19/07	Morgan Stanley	China - China Investment Corp.	9.90%	$5.58 billion
12/24/07	Merrill Lynch	Singapore - Temasek Holdings	9.40%	$4.4 billion
1/15/08	Citigroup	Singapore - Singapore Investment Group	N/A	$7 billion
1/15/08	Citigroup	Kuwait - Kuwait Investment Authority	N/A	$3 billion
1/15/08	Citigroup	Saudi Arabia - Prince Alwaleed bin Talal	N/A	$2 billion (est.)
1/15/08	Merrill Lynch	Kuwait, South Korea, Japan	N/A	$6.6 billion

Unlike private investors who merely seek to make money, foreign governments are interested in extending their power. Buying large stakes in some of America's biggest and most crucial companies does just that.

In the 1980s, Americans became worried when Japanese companies purchased major chunks of U.S. real estate, but today's foreign dealings pose a far greater threat.

The main difference: Japanese companies were looking for profits, foreign leaders are looking to influence U.S. businesses and government policies.

Sovereign wealth funds operated by such non-Democratic regimes as China, Abu Dhabi, Singapore and Kuwait are buying the linchpin to U.S. businesses -- banks and investment firms.

As every American well knows, money greases the wheels of capitalism and assures access and influence over our political leaders. Banks and investment firms wield a lot of influence.

Proponents contend these sovereign funds are only buying minor stakes, not controlling shares. But as any Fortune 500 executive can confirm, corporate sharesholders who own stakes of 5% or more cannot be ignored.

Subtlety is the key

Americans and U.S. leaders are obviously wary of foreign investment. Congress reacted negatively to both China bid to buy oil company Unocal for $18 bil in 2005 and a Dubai company's move to manage 6 U.S. ports in 2006. Both deals collapsed under heavy U.S. opposition.

Foreign governments have learned from their mistakes. Instead of making bold statements with big buyouts, they have taken a more subtle tack.

Buying minority stakes in major U.S. companies gives them access to the halls of U.S. power, both in the business and political sense.

China, as major stakeholders in Bear Stearns and Merrill Lynch, can prod U.S. businesses to expand business ties with Chinese companies.

Abu Dhabi, as a major shareholder in Citigroup, can steer the company toward supporting investments in the Mideast and broker business deals between U.S. and Arab companies.

Don't be surprised to see Citigroup, Bear Stearns and Merrill Lynch take leadership roles in easing foreign trade barriers, especially with China.

World's economic balance is being tipped

The U.S. isn't alone in facing this problem. German Chancellor Angela Merkel warned that her own nation was at risk two years ago after Russian-controlled firms began buying major oil and gas pipelines in Europe.

"How do we actually deal with funds in state hands?" Merkel said. "This is a phenomenon which until now has not existed on such a scale."

The International Monetary Fund has acknowledged sovereign wealth funds pose new challenges to the world's economic balance, but has yet to develop rules of conduct. For example, it could seek to require sovereign wealth funds not to funnel money to political campaigns or seek to sway a nation's political balance.

Currently, some U.S. lawmakers have suggested reworking U.S. regulations to boost regulatory oversight of sovereign wealth funds. But little action appears imminent.

The greatest danger facing America is its failure to address this looming problem.

With the U.S. slipping into a recession and the dollar relatively cheap, it's almost certain more U.S. companies will sell valuable stakes to sovereign powers -- and with it the key to America's future.

Comments

[Greg Pinelli:]

When Great Britain was (and still is) the largest investor and purchaser of US companies and their stock I never heard a peep. This is alarmist garbage and rests on a foundation of equal credibility. Mr. Sterling doesn't know whether these SWFs are extending their "power" (whatever that is) or simply diversifying into a market they saw some huge bargains in...something a few contributors onthis blog were in a fog about.....
This ranks up there with Krassimir Petrov's Iranian Oil Bourse nonsense..and Bob Moriarty's (of the 321 Gold shill blog) shameful slamming of American foreign policy on a page that was supposed to be something else. Get a life..or at least some integrity.

2008 Jan 25 10:03 AM

[erniem:]

Yawn. I remember when Japan was "buying out America" a few decade ago. They ended up getting 40 cents on the dollar for the billions of dollars of property they bought. China has already seen their BX investment lose a third of its value.

2008 Jan 25 12:46 PM

[ND926:]

What about Apollo?

2008 Jan 25 01:46 PM

[User 142738:]

Somewhere in Manhattan, there's an American banker signing stocks over to regimes like Dubai and China, muttering "sucker" under his breath.

2008 Jan 25 02:03 PM

[Philly Jim:]

Pray for a Romney nomination. McCain & Clinton = same same The U.S. has been run by a puppet government for the past 8 years, it's not wonder we have to now sell ourselves to Arabs and Chinese. I don't think it's that big of a deal either way. These Sovereign funds are simply making kind gestures in our time of need, they have an interest in keeping the U.S. consumer buying their oil and junk. If it weren't for gullible American voters electing a phony cowboy to office, we wouldn't be buying Arab oil and Chinese junk. Just think, we were asked to go shopping after 9/11 ! Washington D.C. needs to be turned upside down and shaken out.

Vote Romney for a lean, mean American machine! Romney '08 !

2008 Jan 25 02:48 PM

[jagorev:]

What a pile of xenophobic BS

2008 Jan 25 02:58 PM

[vboring:]

if i had a pile of depreciating USD, i'd be looking for ways to spend it too.

2008 Jan 25 04:37 PM

[Hooligan1:]

What else can the foreign entities do. The only place in the world that the dollar is worth a dollar is here.

2008 Jan 25 04:37 PM

[john1:]

Ring... Ring... Hello? Oh. Hi Mao. Uh-huh. mmm.. Yeah.. uh, look dude, the interest check’s in the mail, dude... yeah. I know, I know... Look, you can have Taiwan dude, I don’t really need it. Just keep sending that Walmart crap tho… yeah? great! Another 1000 container boats (?) Great dude, I need it real bad, dude... Oh, Mao.. yeah, uh, dude... You got another few billion buck`till next month?

2008 Jan 25 06:05 PM

[john1:]

Re: "Vote Romney for a lean, mean American machine! Romney '08 !"

Isn't that what the phony fratboy said?

2008 Jan 25 06:06 PM

[erniem:]

Just a note to myself to remember to visit Europe again while the dollar is still worth fifty cents.

2008 Jan 26 11:22 AM

[GregY:]

Bankers selling their souls - what a hilarious notion! If Mr. Sterling believes that bankers have souls, and someone is willing to buy them, his defense of America and "capitalism" cannot be taken too seriously.

2008 Jan 26 01:11 PM

[lance2210:]

Dear Ken

You're an embrassment. Maybe you should investigate the root causes of why American companies are requiring foreign capital to top up their balance sheets. No foreign investor forced them to invest in CDO's and dodgy sub-prime stuff. Anyway US companies invest overseas buying other companies (see GE) and rarely do other countries complain. You should give yourself an uppercut.

2008 Jan 26 07:41 PM

[Smart1:]

I wonder how Abu Dhabi feels about that AMD investment.....????

2008 Jan 27 12:30 AM

[root_thing:]

In the 19th Century, Europeans bankrolled the Louisiana purchase, the building of US railroads, the steel industry, the oil industry -- even cattle ranches. By the end of WW II, they had very few U.S. holdings. There was the stock market crash, stock sales to finance Europe's own war effort, and confiscation by the US government (mostly German holdings). These days, look at how Russia recently screwed Shell Oil or how Venezuela nationalizes industries whenever they feel like it. To me, it's the foreign investors who are at risk.

2008 Jan 27 02:55 AM