U.S. Mortgaging Its Future for Sovereign Fund Investments

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Includes: AMD, BSC, BX, C, MER, MS, NDAQ
by: Ken Sterling

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 (NYSE:C), Merrill Lynch (MER), Bear Stearns (NYSE: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.