Thursday, January 17, 2008


The big news in the Financial Markets is the amazing amounts of money that Sovereign Funds from the Middle East, China and Singapore are pumping into US and European Banks. Regulators and Lawmakers from the US in particular have thrown open their doors for such cash infusion.

Citigroup is raising $14.5bn and Merrill $6.6bn, largely from private investors and governments in the Middle East and Asia, representing the biggest-ever single transfer of capital to US banks from abroad.

Before Tuesday, UBS had raised $11.9bn from the Government of Singapore Investment Corporation and Middle Eastern investors, Citi $7.5bn from the Abu Dhabi Investment Authority, Morgan Stanley $5bn from China Investment Corporation and Barclays $5bn from China Development Bank and Singapore’s Temasek Holdings. If you add just these investments they total $ 50 billion.

The question is not why the US is taking in this money but what is in it for the SFs. In the case of the Arabs, I would have happily said that they are still under the influence of their colonisers but China and Singapore are not fools. In the case of the Arabs there has always been an inferiority complex for the white races but that should not apply to China and Singapore. The economics of these transaction are clearly not great.

Yes, they are in the form of convertible Bonds giving above market rates but I am not sure at what price they will convert to equity. Clearly in the case of Citibank, the bonds are being made to a Bankrupt organisation to save it from Bankruptcy. The US Government may have been loath to put in this money and must be delirious that Abu Dhabi and Dubai are willing to do it. Citibank is an institution which could not attract any experienced banker to head it and had to settle for Vikram Pandit who bright as he is supposed to be, has no experience of running such a large organisation.

After the first flush of euphoria over being allowed to own a part of the world's largest Bank is over there are serious questions being asked, certainly in China. It is reported that senior Chinese leaders have decided against backing a deal to invest $ 5 billion in Morgan Stanley. The Investor would have been the China Investment Corp. The earlier Investments of China Investment Corp in the Blackstone Group and Barclays PLC have not done well. In fact their return is reported to be Minus 31%.

Clearly these are intended to be long term Investments and they may turn out to be in the plus, ten years from now. That is not the issue. The Issue is that there are far better Investments to be made outside the US which will be a plus both in the short term and the long term. In fact there are far better Investments even in the US e.g. in the energy Industry but here Congress will raise barriers. There are other Investments which are being made on the assumption that the US is about to go into a recession. The Paulson Credit Opportunities Fund has risen 590 % in one year, just betting that the housing market will slump. Any one shorting Citibank would also have made huge amounts of money. Any one shorting the US equity market will also make a lot of money.

Right now the US Government is pushing to sell their junk to the Sovereign funds, just like in the past they have been selling junked arms, tanks, aeroplanes to third world countries including the Middle East.

An early demise of the US would not be good for the world so if the SF's are trying to save the world then it is a very honourable act and one understands that they do not mind writing off 100 billion dollars out of their trillions. As long as they understand that the US represents the past. A chapter in the History of the world is coming to a close. A world created by the victors of World War II has outlived its usefulness. The future belongs to the East and not the West.


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