Wall Street investment banks, hit by huge sub-prime mortgage losses, are turning to foreign banks to bail them out. Merrill Lynch, Wall Street's largest, is expected to suffer a $15 billion write down, and it's turning to foreign investors in Asia and the Middle East who are flush with capital to bail them out in return for a sizable stake in their company. These foreign banks are not bailing out Wall Street firms out of the goodness of their hearts. They are doing it in return for an ownership stake in the company. So not only are foreign companies telling the US government what to do (since they own billions in US government debt), they will now be ordering Wall Street around. And in addition they are buying up US companies and real estate at an unprecedented pace as we go further and further in hock due to our voracious appetite for oil, consumer goods and defense spending.
The developments underscore the rising toll that the mortgage crisis is taking on many once-proud Wall Street banks. In recent months Merrill and several other firms have grabbed financial lifelines from wealthy foreign governments. Further investments by so-called sovereign wealth funds could prompt scrutiny by Congress.
Sovereign wealth funds are government controlled funds set up by the world's exporting superpowers such as China and the Middle East oil producers. In the past they were content to invest in US treasuries i.e. to buy up US government debt. However, now they have turned to buying up the US private sector so more and more of the US is literally in the hands not of foreign private investors but of foreign central governments. This means that foreign central governments are increasingly in a position to control not only the US government but major US corporations and banking and financial interests.
In recent months, the Government of Singapore Investment Corporation, Singapore’s lesser-known government fund, invested $9.7 billion in UBS; Citigroup sold a $7.5 billion stake to the Abu Dhabi Investment Authority; and the China Investment Corporation poured $5 billion into Morgan Stanley.
If a foreign government takes another big stake in Merrill, Congress might ratchet up its scrutiny of sovereign wealth funds, which have ballooned thanks to rising oil prices and booming emerging markets.
On Thursday, Senator Charles E. Schumer, Democrat of New York, expressed concern about the amount of money American financial institutions are contemplating raising from sovereign wealth funds.
“Foreign investment, in general, strengthens our economy and creates jobs,” Senator Schumer said. “Because sovereign wealth funds, by definition, are potentially susceptible to noneconomic interests, the closer they come to exercising control and influence, the greater concerns we have.”
UBS is a huge Swiss bank that lost about $14 billion in the mortgage mess. Morgan Stanley announced on Dec. 19, 2007 that it would sell a $5 billion stake to the China Investment Corporation, that country's sovereign wealth fund, to shore up its capital. Citigroup, is now expected to write off $18.7 billion up from $11 billion, as the credit crunch deepens.
But it's not over yet folks.
Tanona said that after the projected write-downs, Citigroup would still be exposed to $24.5 billion of CDOs [collateralized debt obligations], Merrill $7.7 billion and JPMorgan $5 billion.
He said Merrill's write-down will be larger than previously expected because Thain [Merrill's CEO] will try to clean up problems now rather than let them fester in 2008.
The analyst boosted his forecast for fourth-quarter losses per share to $1.33 from 52 cents at Citigroup, and to $7.00 from $1.50 at Merrill. He cut his forecast for profit per share at JPMorgan to 65 cents from $1.04.
Analysts on average expect respective losses of 61 cents and $4.00 per share at Citigroup and Merrill, and a profit of $1.01 per share at JPMorgan in the fourth quarter, according to Reuters Estimates.
Brad Hintz, a Sanford C. Bernstein & Co analyst, on Thursday predicted a $10 billion fourth-quarter write-down at Merrill, leading to a quarterly loss of $5.10 per share.
Last month, Citigroup shored up capital by selling a $7.5 billion stake to Abu Dhabi's government. Merrill, meanwhile, on Monday announced a $6.2 billion infusion from Singapore's government and money manager Davis Selected Advisers.
Deregulation, repeal of the Glass-Steagall Act and unmitigatged free market capitalism have only served to place US sovereignty at risk as foreign governments buy up US federal and private assets. Foreign governments, who aren't as committed as the US to free market, unregulated capitalism, are eating our lunch. There must be a lesson in here somewhere. Could it be that a more rational approach to the role of capitalism, trade regulation and government's roll in balancing public and private interests is in order? Evidently, the CEOs of Merrill Lynch, Citibank, Bear Stearns and JP Morgan Chase, the lions of Wall Street, were clueless. Most of them were unceremoniously ousted. So how could you expect the hapless consumer of sub-prime mortgages, the average Joe Six Pack, to know what he was getting himself into? The people at the pinnacle of the US economy didn't know what they were doing and as a result they've handed over control to foreign central governments. This isn't the outcome that was projected! Only Goldman Sachs, that sold short its own investors, came out smelling like a rose!
