Le Temps
Wednesday 16 January 2008
Banks are paying for their catastrophic bets on rotten mortgages by an increased dependence on Asian and Gulf money.
Oriental State funds have become the oxygen Western banking giants breathe. Two Wall Street colossi, Citigroup and Merrill Lynch, have just solicited sovereign funds for the second time in two months, for a new refinancing "round" of $21 billion between the two of them. Overall, Middle Eastern and Asian funds for the most part have financed $59 billion of the $100 billion written off by global banks.
Citigroup owes half its most recent bailout to the Singapore government, after Abu Dhabi's purchase of its capital. As of now, money from these regions counts for over a fifth of Citigroup's capital. Singapore and Kuwait hold over a third of the other institution reduced to begging, Merrill Lynch.
This dependence is worrying because it shows the banks are on their knees. Every quarter, they put out their hand. Much more severely than in the third quarter, the fourth quarter saw prices on poor-quality mortgage-backed securities in the United States slump into a bottomless pit. The banks, the balance sheets and results of which are at the complete mercy of an asset market in freefall, had to write down their assets again. And, as the deflation of the speculative bubble most destructive to value since the Great Depression continues against the background of a recession in the United States, further write-downs in the coming quarters are already promised.
The institutions affected by the "sub-prime" crisis have no other choice than to open their minds ... and their shareholding. For the alternative, as the Northern Rock case shows, is nationalization. In the end, the shareholders of the stricken British bank also had to accept opening up to other investors.
This is something to think about here in Switzerland. GIC, the same Singapore fund that saved Citigroup, will soon own nine percent of UBS following its recapitalization. That operation, decried in Switzerland for its discriminatory aspect with respect to existing shareholders, deserved to be considered from a higher perspective. In a time when only oil and trade surplus money can wash away the "subprime" scandal, these misgivings are too ungrateful. A big thank you to sovereign funds!
The West Is Trapped
Le Monde | Editorial
Tuesday 15 January 2008
Although not an exact science, economics obeys a few rather simple principles. The first is that the balance of power is unequal between a company looking for money and an institution disposed to give it some. The second is that a publicly traded company does not choose its shareholders.
The United States is in the process of painfully discovering these verities. The country that refused to cede its ports to a fund owned by the Dubai Emirate in 2005 and that protested against the Chinese state-owned company Cnooc's purchase of oil group Unocal has no other choice today than to accept that funds created by foreign governments take significant participations in Wall Street's most treasured properties.
In France over the last several years, these funds have been invited into most of the big groups listed on the stock exchange. The government's attitude toward them is ambiguous. During his January 8 press conference, Nicolas Sarkozy placed himself right in line with Dominique de Villepin's economic patriotism. "Faced with the rise in power of extremely aggressive speculative funds and of sovereign funds that obey no economic logic, it is out of the question that France fail to respond (...). France assumes the political and strategic choice of protecting its companies." According to the head of state, the Caisse des dépôts [French public sector savings bank and financial institution] should be the "instrument" of this policy.
While on his trip to Saudi Arabia Monday, January 14, Sarkozy changed his tone: "France will always be open to sovereign funds the intentions of which are unambiguous, the governance of which is transparent, and the country of origin of which practices the same openness to foreign capital," he explained. It's no accident that Sarkozy made these statements in Riyadh and not in Moscow or Beijing. Although they may deny it, Westerners welcome Arab capital more willingly today, since its owners have never sought control over the companies in which they invested in the past. On the other hand, they distrust Russian and Chinese capital investors, new entrants on the global stage owned by States for which the economy is a diplomatic weapon.
Confronted with these funds, Westerners have little purchase. Establishing explicit rules is a gamble: the unpleasant and unforeseen consequences of Thierry Breton's economic patriotism decree have proved that. The presence of the Caisse des dépôts among a company's shareholders can be symbolic only and the criticisms surrounding its purchase of EADS' capital shows that its strategy is far from universally applauded. Consequently, for the moment, France is trapped like other Western countries. One does not impose one's own law on one's creditors.
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