Sovereign Wealth Funds (SWFs) -- the $3 trillion worth of capital managed by countries to invest their oil or foreign exchange profits -- got quite a bit of attention earlier this year when they bought big chunks of the U.S. finance industry. But yesterday at a conference at Stanford, a Fed official suggested, without officially saying it, that despite their big wallets, SWFs are not the brightest investors on the block.
I spoke on a panel regarding SWFs at the Forum for American/Chinese Exchange at Stanford (FACES). I was joined on the panel by Brad Setser of the Council on Foreign Relations and Reuven Glick of the San Francisco Federal Reserve. I suggested that China, which in June 2007 bought a big stake in Blackstone Group (NYSE: BX) (for reasons I discussed here) may not have even read the prospectus before buying a $3 billion stake. If China had read the prospectus, it could have saved itself the embarrassment of what is now an investment trading 46% below its purchase price.
During our panel discussion, Glick unofficially argued that if China or any other SWF wanted to make an investment in a U.S. company, they were welcome to do so. He noted that in retrospect, China might be viewed the way Japan was when it famously overpaid for Rockefeller Center and Pebble Beach in 1989. Both investments were subsequently sold at a loss. When I summarized Glick's remarks: "So the Fed thinks that China is a greater fool." He smiled and said, "I didn't say that."
Meanwhile, Reuters reports that on the other side of the country, Blackstone CEO Steve Schwarzman was complaining that all the scrutiny of SWFs was limiting their investment in the U.S. Perhaps the real reason for SWFs recent reluctance to invest in the U.S. is the lousy performance of their 2007 investments here. For that, Schwarzman has no one to blame but himself.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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4-15-2008 @ 5:59PM
NewsVisual said...
In an indication of the precarious state of major American financial institutions, it was reported on Tuesday that Temasek, the sovereign wealth fund of Singapore, purchased $600 million worth of stock in the Merrill Lynch & Co Inc back in February, giving it a $5 billion ownership stake in the company, according to a report in The New York Times. “Merrill Chief Executive John Thain said earlier this month in Tokyo that the U.S. investment bank does not plan to raise more capital and will continue to shrink its balance sheet amid the global credit crunch,” The Times article reported. “Merrill has written down $24 billion worth of investments related to the troubled U.S. mortgage market, which pushed the bank to report a loss of more than $8 billion in 2007,” the Times added. This raises the specter of the investment bank potentially losing much of its value over the long-term. The Merrill shareholders will certainly want to know whether the firm’s Directors are capable of carrying out their legal mandate of protecting their interests.