Wednesday, December 19th, 2007
- Who owns the American Pie? The SWF spending spree goes berserk,
- UBS, Citi, Barneys, Blackstone…the who’s who of the shopping list,
- Reserve doors closing, the dilemma of possessing raw beauty and much
Eric Fry, reporting from Laguna Beach, California…
Once upon a time, a rich SWF could stroll into almost any bar and command the
awe of desperate SWMs and SBMs (and also the occasional SWF or SBF). But
today’s rich SWF wields an entirely different sort of power – it can stroll
into almost any boardroom and command the awe of desperate finance company
Today’s rich SWFs are “Sovereign wealth funds” – not “single white females” –
and they control hundreds of billions of investment dollars. Sovereign wealth
funds are investment pools run by the governments of foreign, usually oil-
“These funds are becoming major players in international finance,” Chris
Mayer explained in the November 20, 2007 edition of the Rude Awakening.
“These great pools of money are something new under the financial sun in that
we have never seen them attain such a massive scale. Four of the eight
largest funds are from the Gulf, with the Abu Dhabi Investment Authority at
the top of the charts.” This massive wealth fund is more than twice the size
of CalPERS, the big California pension fund.
Vast wealth – like raw beauty – is a good problem to have. But owning
hundreds of billions of U.S. dollars may be harder than it looks. Where do
you store them all? In T-bills? In gold? In hedge funds? You gotta put ‘em
somewhere. Unfortunately, many of the traditional, low-yielding “somewheres”
like U.S. T-bills lose their appeal when the dollar’s value slumps. That’s
why the “somewhere” that many SWFs now seek is “somewhere else.” Many SWFs
may be growing tired of buying T-bills that pay 4% per year in a currency
that is losing value at 9% per year.
So now that the dollar’s value has become a bit shaky and unreliable, the
SWFs are moving into investment realms that they had previously shunned.
Increasingly, the SWFs are choosing to become equity-holders in Western
companies, rather than mere debt-holders.
In recent weeks, the Abu Dhabi Investment Authority (ADIA) bought a 5% slice
of Citigroup, while the Government of Singapore Investment Corp. bought a 10%
slice of UBS. Other SWFs have been quietly amassing equity interests in other
“The recent SWF deals illustrate what an awkward position it is to own
hundreds of billions of U.S. dollars these days,” remarks Dan Denning, editor
of the Australian Daily Reckoning. “It’s like Brewster’s Millions…but with a
‘B.’ You’re hard pressed to get rid of that much money, even if you’re trying
to. You have to take bigger and bigger risks.”
Hence the recent spate of deals to buy parts of various Western finance
companies. By investing in companies, rather than Treasury bonds, the SWFs
can swap a pile of dollar bills for an operating company that (hopefully)
will produce a growing income stream.
Abu Dhabi’s wealth fund could easily reach $1 trillion during the next
decade, especially if oil prices continue to hover near $100 a barrel. But
the Abu Dhabi Investment Authority is only one of the SWFs roaming the earth
for attractive investments. So we should not be surprised to see the SWFs
continue their shopping spree in the West. Nor should we be surprised to see
American companies lining up to sell themselves to buyers from the East.
Since spending accumulated (or borrowed) wealth is so much more fun than
earning and saving it, we Americans will likely continue selling bits and
pieces of ourselves to SWFs and foreigners. After all, we gotta get our party
money from somewhere. Let’s forget for the moment that we are selling the
family silver to pay for our daily bread…and for Wall Street’s year-end
bonuses. The simple truth is that the more the SWFs toss their billions our
way, the easier life becomes for our cash-strapped finance sector and for our
“A new worldwide economic regime may be unfolding,” Denning concludes. “The
SWF’s re-capitalize the financial sector in exchange for equity. The Fed
isn’t needed in any active way for this kind of bailout. It simply has to
facilitate a transfer in the ownership of American financial assets to
Crisis averted. Everyone’s happy. But America is poorer…again, as Joel Bowman
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The U.S. “Gets Owned”
By Joel Bowman
When Abu Dhabi’s state-owned wealth fund inhaled almost 5% of Citibank last
month, America got a glimpse of the world to come – a world in which the
asset side of the global balance sheet shifts from West to East.
Get ready to “get owned.”
In a deal that took only a few days to cobble together, the Abu Dhabi
Investment Authority (ADIA) sucked up 4.9% of America’s largest bank for a
mere $7.5 billion. ADIA receives convertible stock in Citigroup yielding 11%
annually. The shares are convertible into common stock at prices ranging from
$31.83 and $37.24 a share, over a period of time between March 2010 and
At first blush, it’s hard to distinguish between predator and prey. Did Abu
get taken, paying $7.5 billion for part of a finance company that sits on
tens of billions of toxic securities? Or did Citi get taken, paying a
usurious 11% to obtain a lifeline? Or did the deal produce a near-perfect
On the one hand, $7.5 billion seems an excessive amount to pay for 5% of a
nose-diving finance company with a wave of subprime hurt still to come. On
the other hand, $7.5 billion is really just a drop in the bucket if you’re
the world’s largest sovereign wealth fund. In fact, the purchase price
represents slightly more than 1% of the ADIA’s assets.
In the battle for the international SWF championship belt, the ADIA throws
punches in a weight class all of its own. At an estimated net value of $625
billion, it dwarfs its closest contenders. Norway ($322bn), Singapore
($215bn), Kuwait ($213bn), China ($200bn) and Russia ($127) round out the
world’s top five heavy hitters.
All of these funds share a similar dilemma: what to do with depreciating
As long as the world’s reserve currency was holding its own, the SWFs seemed
content to tinker with plain-vanilla investments like Treasuries. But now
that the greenback and the U.S. financial sector are both plummeting like
skydivers ensnarled in their chutes, the SWFs seem much more eager to
exchange their dollars for riskier, non-traditional investments.
Perhaps that’s why SWFs and other dollar-laden foreign investors have been
snapping up Western companies left, right and center. According to the
research database outfit Dealogic, foreign buyers accounted for more than one
fifth of all M&A activity in the US this year, the highest level in over a
Some notable bites of the all-American pie this year included China
Investment Corp’s near 10% purchase of the private equity firm Blackstone
Group in May, the $942 million buyout of department store operator Barneys by
the UAE’s Istithmar Group and the $622 million stake acquired in the
chipmaker AMD, gobbled up by Mubadala Development Co., another investment arm
of the government of Abu Dhabi.
But these deals seem relatively quaint alongside the recent deals in the
financial sector. Just a few days ago, the Government of Singapore Investment
Corp. made headlines by agreeing to pay nearly $10 billion for a chunk of
UBS. The purchase makes Singapore UBS’s largest shareholder.
“UBS’s decision to sell as much as 12.4% of the company to Singapore and a
Middle Eastern investor…is the latest in a string of deals in which state
funds or banks in Asia and the Middle East have take stakes in Western
financial firms,” the Wall Street Journal reports. “Government ’sovereign
wealth funds’ have invested about $46.8 billion in European and U.S.
financial firms since January 2006, according to Morgan Stanley estimates.”
“[The UBS deal] is a further sign of how the balance sheet of the world
economy is changing,” Gerard Lyons, chief economist at Standard Chartered
PLC, tells the Wall Street Journal. “Also, it is a reflection of the fragile
state of the financial sector in the West.”
Indeed, and now that many leading companies of the Western world are
clutching financial lifelines from the Middle East and Asia, humility has
crept into the political rhetoric. Apparently, all those rich investors from
the Middle East don’t seem quite as threatening as they did last year when
they were trying to buy a few American ports. In today’s crisis-strewn
financial landscape, the same Middle Eastern investors that most American
politicians reviled as unsavory predators one year ago are now heralded as
New York Senator Charles E. Schumer’s recent about-face typifies the new
American perspective. “It seemed to me that this [Abu Dhabi deal] is good for
Citigroup,” said, the schmoozing chairman of the Joint Economic Committee and
senior member of the Senate Banking and Finance Committees. “It’s good for
jobs in New York. It bolsters their capital position, allows what is
fundamentally a very strong company to weather a difficult time.”
One might be inclined to view the Senator’s remarks as sincere, enlightened,
or even progressive, until they are reminded that it was Schumer who
introduced added amendments to a senate bill last year to block the Dubai
Ports World deal.
Americans angered by the thought of foreign companies buying up their
backyard won’t get a reprieve anytime soon, it seems. According to McKinsey
Global Institute, petrodollar reserves, of which SWF’s constitute about 60%
of total net worth, will grow from just over $3 trillion to almost $6
trillion by the year 2012. And here’s the real kick in the shins…that
estimate is computed by factoring in oil at just $50 a barrel, or about half
what it costs right now!
Doubling the capital firepower of these SWFs will result in far more sizeable
acquisitions. Doubling the price of oil might just prompt them to take the
One day soon, we may find ourselves banking at the friendly neighborhood Bank
of Abu Dhabi Citigroup. And yes, the bank will continue to accept U.S. dollar
deposits, but dirhams would be preferred.
Get ready to get owned.