America for Sale

Story notes:

• A number of US Financials have accepted another round of investment from sovereign wealth funds (SWFs).
• Many fear foreign governments influencing the operations of US firms.
• These fears are unwarranted. SWFs largely haven't been given voting rights, and are more interested in making a fine return on their investment.

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Are we selling America out from underneath ourselves? Recently Citigroup, Merrill Lynch, Morgan Stanley and UBS have all accepted more capital infusions from sovereign wealth funds (SWFs)—pools of assets owned and guided by a foreign government. Emerging and oil-rich nations have found themselves awash in cash of late due to healthier-than-expected global growth. Hence the proliferation of SWFs—the Korean Investment Corp, Singapore's Temasek Holdings, and the Kuwait Investment Authority, among others—all looking to park assets in America.

World Rides to Wall Street's Rescue
By David Enrich, Robin Sidel and Susanne Craig, Wall Street Journal
https://www.wsj.com/articles/SB120044526135892909

We're struck by this passage in the previous article, "In the latest sign of America's sinking financial fortunes, investors from as far afield as Japan, Korea, Singapore, Saudi Arabia and Kuwait have come to the rescue of Wall Street." We don't view foreign investors interested in America as a foreboding sign. Rather, we'd be troubled if no one wanted to invest in Wall Street at all. (For more, see "Lenders on the Block," 01/11/2008.)

And there's that word—"rescue." Why not call it an investment? "Rescue" implies a selfless act with no reward expected beyond a warm, fuzzy feeling. Japan, Korea, Singapore, et. al., are likely not investing for the warm fuzzies. They see opportunities hard for a Financials-shy public to fathom right now. We doubt they'd throw money away on firms they view as doomed for the dustbin. Rather, they probably suspect Financials firms will rebound eventually. When? Probably not right away, but if they can be patient, why not buy when sentiment is exceedingly poor and valuations have fallen? Isn't the idea to buy low?

Folks gripe over SWFs' lack of transparency. But even more, many fear foreign meddling in our private firms. These aren't foreign individuals or institutions—these are governments themselves steering capital into our private industries.

The Unsettling Zeitgeist of State Capitalism
Jeffrey Garten, Financial Times
https://www.ft.com/content/f0f2a32e-c2d6-11dc-b617-0000779fd2ac

We prefer private ownership over state ownership of assets, pretty much always. But sovereign wealth funds aren't akin to state seizure of private firms, as the previous article suggests. Rather, we view this as rather smart stewardship of a nation's revenues. Why not get a better return if you can?

But will foreign governments have undue influence on our private sector? Will they make unreasonable demands, forcing US firms to meet layers of labyrinthine or peculiar regulations? Not likely. Note, virtually all SWF investments of late have involved non-voting shares—SWFs won't have any say over how companies are run. We can't know how future deals will go down, but it's hard to imagine firms handing over large voting blocs to foreign governments. The SWFs seem more interested in the return they can get from making calculated investments than plotting world domination.

Fear of foreign investment is nothing new. Investors were terrified of Japan buying choice American real estate in the 1980s—but we benefited greatly from Japan's spending on our shores. Japan didn't fare quite so well, but that was tied more to Japan's structural problems than their US shopping spree.

We don't view SWFs' investments as troubling. Rather, we think it's a fine feature of globalization. Capital is capital—the freer it flows the better. And if foreign investment is going to flow somewhere, most folks would prefer it fuels American ingenuity, rather than ending up elsewhere.