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Asian, Mideast funds unleash cultural revolution on Wall Street

(AFP) / 25 December 2007

WASHINGTON - State-run investment funds from Asia and the Middle East are unleashing a cultural revolution on Wall Street, buying up big stakes in ailing US banks.

Concerns have spiked in recent weeks as some of America’s top investment banks have sought vast cash infusions to offset multi-billion dollar losses triggered by a deep housing slump and a related credit crunch.

Merrill Lynch announced Monday that Temasek Holdings Pte. Ltd., a Singapore state-owned investment group, was buying a 4.4-billion-dollar shareholding in the company.

The deal follows hot on the heels of Morgan Stanley’s announcement last week that the China Investment Corporation (CIC) had obtained a five-billion-dollar stake in the firm.

Morgan Stanley, like other US financial groups, is reeling from heavy losses and vying to shore up its bloodied balance sheet. CIC’s deal enables it to gain up to a 9.9 percent shareholding in Morgan Stanley.

State-controlled Middle East funds are also getting in on the act. The Abu Dhabi Investment Authority of the United Arab Emirates grabbed a hefty 7.5-billion-dollar shareholding in Citigroup last month.

President George W. Bush addressed the flurry of such deals during a White House press conference on Thursday.

“I don’t think it’s a problem,” Bush said, as he warned against a protectionist backlash, which he said could harm investment flows.

Beijing’s financial firepower has been swelled by over one trillion dollars of foreign currency reserves while the energy-rich UAE’s coffers have been fattened by rocketing oil prices.

Top US government officials say the deals should not spark undue alarm, but do merit scrutiny.

“The most obvious consideration is national security,” Robert Kimmitt, the deputy US Treasury secretary, wrote in the latest edition of Foreign Affairs, a high brow journal published by the Council on Foreign Relations and read by elite policymakers.

Kimmitt, a former Army officer who saw combat during the Vietnam war, said national security concerns could arise from the extent of control state-run funds seek to exert over their investments, and in relation to possible intelligence-gathering.

Investments by Singapore, China and the UAE on Wall Street are so far viewed as “passive,” meaning Singapore, Beijing and Abu Dhabi governments will have no control over the management and operations of the US banks.

The interagency Committee on Foreign Investments in the United States (CFIUS), which reviews foreign investments, has not blocked any of the deals so far.

Democratic Senator Christopher Dodd, the powerful chairman of the Senate Banking Committee, said last week, however, that he wants to know more of the “specifics” about the Morgan Stanley deal, including whether a CFIUS review is warranted.

CIC grabbed a three-billion-dollar stake in the Blackstone Group, a large private equity firm, earlier this year and China’s CITIC Securities Company Ltd. bought a six percent shareholding in Bear Stearns, another troubled US investment house, for one billion dollars in October.

Analysts believe more deals are likely, especially as the foreign funds are sitting on huge cash stockpiles.

US banks have been forced to seek cash injections because of heavy losses on mortgage investments. Merrill ousted its former chief executive officer and chairman Stan O’Neal in late October after announcing nearly eight billion dollars in writeoffs.

Although the investment tide appears to have turned in favor of foreign funds, the money flows are not all one way.

Bank of America said last month that its three billion dollar investment in the China Construction Bank in 2005 had surged in value to 19 billion dollars, reaping a paper gain of 16 billion.

 
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