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China's sovereign wealth fund said it
wouldn' t dare invest in foreign financial firms after losing $6 billion on
stakes in Morgan Stanley >>
ARTICLE
 
Sovereign funds' appetite for risky
deals dulled
Sovereign wealth funds are looking less
keen to live up to their recent reputation as investors of last resort,
given huge investments they made in failed Western banks are turning sour
one year into the credit crunch.
State-owned wealth funds, which manage
almost US$3 trillion in assets, have grabbed global financial markets'
attention since last year, when they replaced hedge funds and private equity
as the main driver of corporate takeover activity.
Since 2007, these sovereign funds -
mainly from emerging economies with excess reserves - have spent nearly
US$80 billion to buy stakes in major banks desperately needing cash to
repair balance sheets damaged by losses on US sub-prime mortgages.
It was a match made in heaven - except
that the arrival of the sovereign funds does not seem to have been enough to
stop the rot. Banking stocks have continued to tumble and some shares have
become diluted as a result of rights issues.
Most sovereign wealth funds (SWFs) do not
have to report mark-to-market losses in public and some argue they can ride
out temporary losses and cycle downturns to seek long-term returns.
But while they are unlikely to unwind
investments they have already made, their appetite for jumping into risky
deals again may be dulled.
'The opportunity of making large-scale
investments in Western investment banks doesn't come along very often. They
have made these investments because it was a rare opportunity and one they
could not turn down,' said Ben Faulks, associate director at Standard &
Poor's.
'(But) wealth funds have a mandate to
make money, not to plough money into ventures destined for collapse. They
are not charities. They won't make investments unless they think they can
make money.' In a sign that SWFs might be worried about their loss-making
investments, South Korea's state-owned fund said it had posted about US$800
million in valuation losses before it converted preferred shares of Merrill
Lynch into common stocks last week, more than two years ahead of schedule.
Under the original agreement, Korean
Investment Corporation was to swap the shares into common stocks in
mid-October 2010, but the fund had faced heavy criticism after Merrill's
share price tumbled more than 50 per cent this year.
'We learned a lot of good lessons from
the investment in Merrill Lynch,' said Chin Youngwook, KIC's chief
executive.' 'I think we may have to approach cautiously.' Another official
at KIC said a share purchase in other US financial firms could skew its
portfolios and the fund was not seriously considering raising exposure to
them at the moment.
Also facing huge paper losses on its
Merrill investment, Singapore's wealth fund Temasek negotiated a rebate of
US$2.5 billion on its original US$4.4 billion stock purchase after the US
investment bank raised fresh funds in July.
'SWFs have emerged as significant global
investors,' said Gay Huey Evans, who as vice-chairman of investment banking
and investment management at Barclays is responsible for coordinating the
financial group's sovereign wealth business.
'If you are significant investors like
SWFs, your management of risks has become even more important. There has
been huge focus and improvement in risk management. Risk awareness is
greater now than a year ago.' -
2008 August 7 - REUTERS
A lot of of
nonsense is talked about sovereign wealth funds both by people who do not
know what such funds are all about, as well as by those who cling to the
notion that only Anglo-Saxon systems of wealth management are worthy of
trust. Since Japan could soon become the latest among leading Asian nations
to create such a fund, this might be a timely moment to clear up a few of
the misunderstandings.
Not all sovereign wealth funds or SWFs are equal. Some, like those of
Middle Eastern oil producers (or Norway), for example, get their money from
oil revenues that accrue to state-owned oil companies. In other cases (such
as that of Singapore), the money comes from budget surpluses. In both cases,
the money 'belongs' to the government in question, which is free to spend or
invest it how it will.
In China's case (as would be the case also with Japan), the money comes
from foreign-exchange reserves. This is where misunderstanding arises
because those reserves technically do not belong to the government. If a
finance ministry, or central bank acting as agent, wishes to buy say
dollars, in order to prevent appreciation of its exchange rate (China's
case), it has to borrow that money. They normally borrow the money by
issuing short- term foreign exchange bills (FBs) to the market, which are
continually rolled over at maturity. Whenever a SWF is formed from foreign
exchange reserves, there is a liability to match the asset. The government
sits on a nice pile of dollars (or other foreign currency), but it also has
a stack of FBs denominated in its own currency which it has to repay.
When those who ought to know better start suggesting (as one commentator
did recently in the Financial Times or FT) that Japan should give away a
chunk of its foreign exchange reserves to the population in general rather
than finance a sovereign wealth, one begins to wonder. This is a bit like
suggesting that a government should finance a general tax rebate out of
borrowed money.
China has acted with characteristic financial acumen in financing its
SWF. It wisely refinanced a big chunk of its short-term bills, issued to
cover the cost of buying dollars in the foreign exchange market, by issuing
10- year bonds instead. This means that while the funds employed by China's
SWF (around US$200 billion) are still borrowed, the money is now at much
longer maturities and more predictable cost. This is a course that Japan
could also take if it decides to launch a sovereign fund using part of its
US$1 trillion of foreign exchange reserves (something which is looking
increasingly likely). Or, it might decide simply to use the hefty annual
income from its current reserves to put into a SWF.
All this, of course, raises the question of how wise it is for countries
like China or Japan to continue running the foreign exchange risk of holding
foreign currency assets when their liabilities are in their own currency. Of
course, where the assets acquired by a SWF are deemed to be of 'strategic'
value (such as a foreign oil field), there may be justification. But perhaps
they would be better off in the long term by selling the reserves and
converting them back to their own currency in order to repay the borrowers.
Misunderstanding about who the money belongs to and how it can be
employed is only one problem that SWFs face. They are accused by officials
in the US and other Anglo-Saxon jurisdictions of being 'untransparent' in
their dealings. The whole industry of collateralised debt obligations and
other financial exotica built up on the back of sub-prime mortgages and
securitisation was hardly a model of transparency and yet still the pot
feels free to call the kettle black. What is stunning too is the hypocrisy
of attacking SWFs even as they recapitalise and bail out Western financial
institutions that have been brought to their knees by the sub-prime debacle.
It is interesting to speculate how free SWFs would have been to play this
role of white knight had they been subject to all the scrutiny and jumping
through regulatory hoops that some want to impose on them. The US and other
governments might then have had to dig into their own (empty) pockets to
ward off systemic financial failure.
My general point, however, is that too much time continues to be devoted
by the IMF and others to trying to work out 'codes of conduct' for SWFs at a
time when the dollar is collapsing and the whole Western financial and
economic edifice is wobbling. Likewise, financial regulators in various
parts of the world continue to argue over whether Islamic finance measures
up against Western standards, even as those standards are being called in
question by the sub-prime mess. Truly a case of 'fiddling while Rome burns'.
- 2008 March 7
BUSINESS
TIMES
Sovereign wealth funds are OK: US
lawmakers
US
lawmakers and top officials said on Wednesday that sovereign wealth funds,
which have drawn criticism for recent multibillion-dollar injections into
battered US banks, are in fact good.
Both
Democratic and Republican lawmakers credited such funds for providing much
needed capital, indicating it is unlikely Congress will set new barriers on
foreign investment.
'We
would be worse off without those injections of funds,' House Financial
Services Committee chairman Barney Frank, a Massachusetts Democrat, said at
a hearing in Washington.
He
faulted the US economic policies for making the investments necessary.
'Problems
in the American economy, made here in America, created needs that sovereign
wealth funds fill,' Mr Frank said.
'It
is in the interest of the US economy to welcome this investment,' said
Alabama Republican Spencer Bachus.
Citigroup
alone raised about US$12.5 billion after announcing a record quarterly loss
of nearly US$10 billion. Nearly US$7 billion came from the Government of
Singapore Investment Corp and US$3 billion was from the Kuwait Investment
Authority.
Representative
Paul Kanjorski, a Pennsylvania Democrat, also blamed the US for SWF
investments.'We created the huge trade imbalances that bolster other
governments' currency reserves and enable them to invest in our economy.'
However,
he expressed concern that a foreign government motivated by politics could
abuse its stakes in US companies. A foreign owner of an American electrical
utility, for example, could shut down the power, he said.
Several
officials testifying before the financial services sub-committee on the
topic were supportive of SWF investments.
'Sovereign
wealth funds have been a beneficial source of capital for US financial
institutions,' said Scott Alvarez, Federal Reserve Board general counsel .
Ethiopis
Tafara, director of the US Securities and Exchange Commission's office of
international affairs, is all for SWFs, though governments 'can in some
cases control certain economic events, and may have information advantages
over private market participants'.
Some
lawmakers have toyed with the idea of legislation. But two non-controversial
sovereign wealth funds, Norway's Government Pension Fund-Global and
Singapore's Temasek Holdings, warned against laws that would create
restrictions and treat certain investors differently.
'We
will see that this is a less attractive market because it would erode the
confidence in corporate governance,' said Martin Skancke, director general
of the Norwegian wealth fund.
On
Tuesday, the EU finance ministers agreed that Europe should remain open to
investments from state-backed funds as fears about their political motives
are unfounded.
'Sovereign
wealth funds have played, still play and will play an important role,' said
Andrej Bajuk, finance minister of Slovenia, at a news conference. He
endorsed a global initiative to put together a voluntary code of conduct for
SWFs by later this year.
- 2008 March 7 REUTERS
The invasion of the sovereign-wealth
funds
Ben Bernake once spoke of dropping money
from helicopters, if necessary, to save an economy in distress. The chairman
of the Federal Reserve probably did not envisage that choppers bearing the
insignia of oil-rich Gulf states and cash-rich Asian countries would hover
over Wall Street. Yet just such a squadron has flown to the rescue of
capitalism's finest.
On January 15th the governments of Singapore, Kuwait and South Korea
provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two
banks that have lost fortunes in America's credit crisis. It was not the
first time either had tapped the surplus savings of developing countries,
known as sovereign-wealth funds, that have proliferated in recent years
thanks to bumper oil prices and surging Asian exports. Since the subprime-mortgage
fiasco unfolded last year, such funds have gambled almost $69 billion on
recapitalising the rich world's biggest investment banks (far more than
usually goes the other way in an emerging-markets crisis). With as much as
$2.9 trillion to invest (see article),
the funds' horizons go beyond finance to telecoms and technology companies,
casino operators, even aerospace. But it is in banking where they have
arrived most spectacularly. They have deftly played the role of saviour just
when Western banks have been exposed as the Achilles heel of the global
financial system.
Moneymen or mischief-makers
At first sight this is proof that capitalism works. Money is flowing from
countries with excess savings to those that need it. Rather than blowing
their reserves on gargantuan schemes, Arab and Asian governments are
investing it, relatively professionally. But there are still two sets of
concerns. The first has to do with the shortcomings of sovereign-wealth
funds. The second, bigger, problem is the backlash they will surely provoke
from protectionists and nationalists. Already, Nicolas Sarkozy, the French
president, has promised to protect innocent French managers from the
“extremely aggressive” sovereign funds (even though none has shown much
interest in his country).
Although sovereign-wealth funds hold a bare 2% of the assets traded
throughout the world, they are growing fast, and are at least as big as the
global hedge-fund industry. But, unlike hedge funds, sovereign-wealth funds
are not necessarily driven by the pressures of profit and loss. With a few
exceptions (like Norway's), most do not even bother to reveal what their
goals are—let alone their investments.
For the bosses at the companies they invest in, that may be a godsend:
how nice to be bailed out by a discreet “long-termist” investor who lets
you keep your job, rather than be forked out in the Augean clean-up
hedge-fund types might demand. A quick glance back at “long-termist”
nationalised industries shows what a mess that leads too. And it is not just
a matter of efficiency. The motives of the sovereign moneymen could be
sinister: stifling competition; protecting national champions; engaging,
even, in geopolitical troublemaking. Despite their disruptive market power,
their managers have little accountability to regulators, shareholders or
voters. Such conditions are almost bound to produce rogue traders.
So far there is no evidence of such “mischievous” behaviour, as the
German government calls it (curiously, from another country yet to attract
the sovereign-wealth crowd). And weighing the risk of such eventualities
against the rewards of hard cash, on the table, right now, makes it clearly
daft to raise too much of a stink. America is either in recession or near
one; Mr Bernanke has all but promised more aggressive rate cuts, but
confidence in the banking system is low. There is a wise old proverb about
beggars and choosers.
The relatively friendly welcome sovereign funds have found in America may
be temporary. Before the credit crunch American politicians objected to
Arabs owning ports and Chinese owning oil firms. On January 15th Hillary
Clinton said: “We need to have a lot more control over what they
[sovereign-wealth funds] do and how they do it.” Once an emergency has
passed, foreign money can often be less welcome. One of Singapore's funds,
Temasek, has learned that lesson to its cost in Indonesia.
In politics, appeals to fear usually sell better than those to reason.
But the hypocrisy of erecting barriers to foreign investment while demanding
open access to developing markets is self-evident. Host countries should not
set up special regimes for sovereign wealth. Although every country has
concerns about national security and financial stability, most already have
safeguards for bank ownership and defence.
Until East and West even out the surpluses and deficits in their
economies, sovereign-wealth funds will not go away. Ideally, the
high-savings countries of the Middle East and Asia would liberalise their
economies, allowing their own citizens to invest for themselves, rather than
paying bureaucrats to do it for them. But do not expect miracles. In the
meantime, what should be done to keep the rod of protectionism off
their—and the world's—backs?
Shed light or take heat
For a start, more transparency would go a long way towards easing
concerns: an annual report that discloses the fund's motives and main
holdings would be a start. Investments through third parties, such as hedge
funds, help too, providing an additional layer of protection against the
misdeeds of rogues. Ideally, the funds would eventually take fewer stakes in
individual companies, which expose them to the inevitable risks of
stockpicking and political pressure. Investing across indices provides more
diversification anyway.
At a time when Western governments have at last learned to let the
private sector run banks (however lousily it is sometimes done), it is far
from ideal that state-owned funds from emerging economies should be buying
stakes in them, even minority ones. On the other hand, such cross-border
bargain-hunting gives developing countries a bigger direct stake in
capitalism's future. The chief danger will not lie with them. The problem is
likely to be in the rich world—and a rising nervousness about foreign
money. - 2008 January 17
ECONOMIST Cover Story
Asian Firms
Become the Acquirers
Asian companies are increasingly emerging
as a predator rather than prey on the merger-and-acquisition front, with the
region's robust growth and a credit crunch elsewhere contributing to the
reversal of fortunes.
Armed with the "three Cs" --
credit, cash and currency -- companies from India to China will buy an
increasing number of overseas assets, not just in raw materials and energy,
but also in financial institutions, utilities, and marquee brands, analysts
and bankers say. Korean and Japanese firms, meanwhile, are also seeking out
good deals in the West. -
2008 January 9 WALL
ST JOURNAL
Citi,
Merrill in talks for more foreign funds
They
both could get up to US$14b from Mid-Eastern, other govts, says WSJCitigroup
and Merrill Lynch are in discussions to receive more capital from investors,
primarily foreign governments, The Wall Street Journal reported yesterday.
Citigroup could get as much as US$10
billion, likely all from foreign governments, while Merrill is expected to
get US$3 billion to US$4 billion, much of it from a Middle Eastern
government investment fund, the report said.
Citigroup has already received about
US$7.5 billion from Abu Dhabi. Merrill said last month that it is raising as
much as US$6.2 billion from Singapore's Temasek Holdings Pte and New
York-based money manager Davis Selected Advisors. Temasek paid US$4.4
billion for its stake.
The WSJ report also said Citigroup's
board is expected to discuss cutting the firm's dividend in half, a move
that could save it more than US$5 billion a year.
Citigroup may receive additional funds
from the Government of Singapore Investment Corporation (GIC), the WSJ said.
GIC was an investor in Old Lane LP, the hedge fund company founded by
Citigroup CEO Vikram Pandit.
Jennifer Lewis, a GIC spokeswoman, said
she was not immediately able to comment.
Banks and securities firms in the United
States and Europe have turned to Asian and Middle Eastern governments for
about US$34 billion to prop up balance sheets battered by write-downs from
the collapse of the US sub-prime market.
Citigroup and Merrill want to secure
additional financing before they report the extent of their fourth-quarter
losses next week, the WSJ reported.
'The sub-prime situation has not been
resolved and banks are looking to strengthen their capital in order to
weather through this storm,' said Arthur Lau, who helps manage US$50 billion
at JF Asset Management in Hong Kong.
Citigroup may post US$18.7 billion of
fourth-quarter write-downs for mortgages and bad loans and cut its dividend
by 40 per cent, while Merrill may report US$11.5 billion of write-downs,
according to Goldman Sachs Group analyst William Tanona.
Citigroup and Merrill lost almost 50 per
cent of their market value in the past 12 months and the companies replaced
their chief executive officers.
'When more investors or value investors
are taking the opportunity to invest in US banks, one may guess the
situation could hopefully bottom out soon because they see value to invest
at this level,' Mr Lau said.
China Investment Corp is buying an almost
10 per cent stake in Morgan Stanley for US$5 billion after the
second-biggest US securities firm reported a fourth-quarter loss of US$9.4
billion from mortgage-related holdings.
Zurich-based UBS and Bear Stearns Cos
also received sovereign money after bad investments depressed profits. UBS,
the biggest Swiss bank, replenished its capital last month with 13 billion
Swiss francs (S$16.7 billion) from GIC and an unidentified Middle Eastern
investor by selling them bonds that will convert into shares.
Bear Stearns, the fifth-largest US
securities firm by market value, moved to shore up investor support in
October by selling a stake to China's government-controlled Citic Securities
Co.
The WSJ said the investments from
overseas may attract scrutiny from US lawmakers.
Yesterday, Citigroup gained 12 cents to
US$27.61 in German trading and 66 cents to US$28.15 in Japan, while Merrill
fell 28 cents to US$50.20 in Germany.
- 2008 January 11 REUTERS, BLOOMBERG
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