News that Washington Mutual (NYSE: WM) is close to receiving a $5 billion cash infusion from a U.S. consortium bucks the trend that we have seen of late where U.S. banks take money from foreign sovereign wealth funds. I think that this is a very important step.

First, it shows that American private equity groups believe that U.S. banks are starting to get cheap and they are willing to pull the trigger on some big deals. This should help drive the market forward, as it will be a sign to many that the worst is over.

Additionally, it keeps the financial system in U.S. hands. I posted a while back about the potential security threats posed to the U.S. by foreigners taking control of our financial system. One of the big tools in the war on terror has been using the banks to track all kinds of money transfers. With foreigners taking over sizable chunks of the banking system, this tool will be much harder for the security agencies to use.

Thirty years ago, when Washington Mutual was just a small local bank operating in the state of Washington, its slogan was "a friend of the family." It looks as if it is going back to its roots.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/7/08

News that the European Commission is planning to adopt proposals next week that will ask sovereign wealth funds to accept a code of conduct to govern their investment activities, raises the question if the U.S. government should take a look at the impact these funds may have on U.S. security.

Peter Mandelson, the European trade commissioner, said the code will outline standards of governance and transparency for such funds.

"The emphasis in their investments should be on commercial motivations, not national or strategic considerations. I think such a code is possible to draw up and would get acceptance from the wealth funds," the report quoted Mandelson as saying.

German companies, for example, are worried that China will steal their intellectual property or that Russian President Vladimir Putin wants to use such investments "as a political instrument," according to European Member of Parliament Wolf Klinz.

In a development likely to be warmly-received by international finance and stock markets, Russia announced Thursday it will buy Fannie Mae and Freddie Mac bonds through its sovereign wealth funds, Russia's Finance Ministry said and Bloomberg News reported.

Russia will invest money from its Reserve Fund and National Wellbeing Fund into 15 government bond funds in Europe and the United States, including those in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Russia will also purchase government bonds in the U.K., Germany, France, Austria, Canada, and the Netherlands, Bloomberg News reported.

Both Fannie, down 56 cents $29.27, and Freddie, down 80 cents to $27.94, moved lower Thursday afternoon; however it should be noted that the declines occurred during a broad market sell-off, with the Dow down 159 points to 12,267.

The New York Times reports that Japan's decade-long economic slump following the bursting of its 1980s economic bubble offers important lessons for the U.S. Of these, the most important one seems to be that banks and others exposed to bad loans should write them off fast and move on. It was Japan's unwillingness to bite the bullet that kept it stuck for a decade.

Last month, I compared Japan's negative interest rates to the ones we have now. But what caused the predicament that led Japan to cut its rates so much? In Japan, housing prices in the major metropolitan regions nearly tripled from 1985 to 1991, then proceeded to lose two-thirds of their value over the next 14 years. In the U.S., the price run up was less extreme: house prices rose 82% from November 2001 to their peak in June 2006. Since the peak, house prices have fallen 10% with 10% to 15% further to go.

Japan was slow to write-down its bad loans. That's because its industrial groups, or keiretsu, had tight links with banks, so when a bank got in trouble it was often quietly bailed out temporarily with loans or investments from other members of the corporate group. In the U.S., banks are quicker to take write-downs and so far we've used Sovereign Wealth Funds (SWFs) to recapitalize the banks.

The lesson we should learn from Japan is that the sooner we face reality, the sooner we can solve our problems and move on to the next period of growth. A larger question is whether we can grow without creating another bubble.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Here's a concept at least one economist (and probably others) would like to see: a of shift some GDP growth from China to the United States.

China reported that Q4 GDP growth totaled a blistering 11.2%, with 2007 GDP growth coming in at 11.4%, China's fourth consecutive year of double-digit GDP gains.

China approaches U.S, E.U.

China's GDP is now $3.4 trillion, still behind the U.S. and the European Union. However, in purchasing power parity terms, China's GDP is roughly the same as the U.S. and E.U.'s.

Moreover, China's 2007 GDP gains came despite the fact that the Chinese government has undertaken several measures -- from interest rate hikes, to price hikes, to limits on investment, among other decisions -- to slow its overheated economy.

Some senators from the South still wear linen suits and believe that foreign interests should not own land or a part of any business in the U.S. They also probably still smoke and eat fatty foods.

But the serious side of congressional concern about overseas investments in big U.S. companies and financial firms is that sovereign funds could find a more and more hostile reception to their investments in companies like Citigroup (NYSE: C).

According to the FT, "The Treasury, which considers the discussions with the funds a priority, hopes it can pursue its agenda through the International Monetary Fund, which is drawing up a code for SWF investments, expected in draft form in April." The document is probably no more than a "feel good" piece of paper that Treasury can wave around in the offices of Congress and regulators.

The fact of the matter is that the government here would like sovereign funds to have different rules than those that govern people like Carl Icahn. If a raider can take over an entire company and break it into pieces, why can't the same be done by rich interests from Kuwait, if they have the money? Any "state secrets" at a firm like Citi can be burned before the process starts, in the name of keeping important government data confidential.

The bonfire from the documents can warm the management as they leave the building.

Douglas A. McIntyre is an editor at 247wallst.com.

With the U.S. stock market off to a pretty rough start to 2008, investors can take comfort of sorts in this: foreign investors are buying stakes in our companies at a record pace.

According to the New York Times, "With a growing share of investment coming from so-called sovereign wealth funds -- vast pools of money controlled by governments from China to the Middle East -- lawmakers and regulators are calling for greater scrutiny to ensure that foreign countries do not gain influence over the financial system or military-related technology. On the presidential campaign trail, the Democratic candidates have begun to focus on these foreign funds, calling for international rules that would make them more transparent."

The political aspects and long-term questions aside, the rapid growth in foreign investment would seem to indicate that U.S. equities are undervalued.

The factors driving down stock prices may be short-term or localized, but record foreign investments demonstrate that cash-rich investors think they're a compelling value -- and maybe we should too.

You know that an economic issue has jumped the shark when the New York Times's op-editoraliste Maureen Dowd (MoDo) devotes her Sunday column to it. What's unleashed MoDo's moxie is how Sovereign Wealth Funds (SWFs) -- those government investment funds estimated to control between $2 trillion and $15 trillion -- are buying up chunks of the U.S. banking system.

The problem against which MoDo rails is that thanks to the policies of George W. Bush, the price of oil has quadrupled and the dollar has plummeted -- thus putting the U.S. at the mercy of those Arabian SWFs whose owners he groveled to this week to lower the price of oil. And while W. was grovelling, so were the CEOs of Citigroup Inc. (NYSE: C) and Merrill Lynch & Co. (NYSE: MER) -- seeking capital to shore up their Collateralized Debt Obligation (CDO)-tarnished balance sheets. MoDo is right that with Bush's $2.4 trillion worth of wars and $1.3 trillion worth of tax cuts, the U.S. has gone from being the world's creditor to its debtor.

But another New York Times article sheds more light on the phenomenon of foreign investment in the U.S. -- suggesting that with their $414 billion worth of 2007 purchases in the U.S., foreign investors, including SWFs, spent a record amount of money buying up the U.S. last year -- up 90% from 2006. The Times suggests that this foreign investment comes in different forms -- some of which are beneficial. How so?

It looks like the sale of equity in Merrill Lynch (NYSE: MER) is not over, as losses at the firm are likely in Q4. According to The New York Post, "Merrill Lynch & Co. is in talks with Chinese and Middle Eastern sovereign wealth funds to raise capital by selling another 'big' stake in the company."

That is bad news for current Merrill shareholders, who just watched Singapore's Temasek Holdings put $4.4 billion into the broker. The value of Merrill's shares is off almost 50% this year to under $53. If the company has to raise another $10 billion, the dilution could take the stock below $40.

Shareholders in Merrill have to wonder why the company does not sell its piece of Blackrock (NYSE: BLK). The investment company has a market cap of $14 billion. Merrill owns about half of the company.

Merrill also has the option of breaking its brokerage and wealth management businesses off from its investment bank.

It is not clear that bringing in cash from outside the firm is the best answer for Merrill shareholders.

Douglas A. McIntyre is an editor at 247wallst.com.

What does the coming year hold for the economy? BloggingStocks' Peter Cohan considers five issues that will factor heavily in 2008.

Sovereign Wealth Funds (SWFs) are estimated to be between $2 trillion and $15 trillion. That's a wide range, but even at the low end, it's a lot of money. The SWFs are potentially economic and political Trojan horses. They are using the current problems in the credit markets as a chance to buy stakes in U.S. banks for relatively paltry sums. It remains to be seen whether they are getting in at the bottom or whether they're foolishly buying in way too soon.

However, if they get big enough stakes in strategic industries in the U.S., they will be in a position to influence U.S. policy. For example, if the funds do not like U.S. Middle East policies, they can threaten to withdraw their capital. If that capital is hard to replace, the U.S. will find itself needing to choose between imperiling the survival of its banking system or changing its foreign policies.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.