The Financial Crisis: Economic Disaster, Strategic Boon

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THE STASH MAY 26, 2009

The Financial Crisis: Economic Disaster, Strategic Boon

Dan Gross has an interesting piece up at Slate about the fate of all the sovereign-wealth funds (SWFs) that looked poised to take over big chunks of the U.S. economy two years ago. (Sovereign-wealth funds are bascially massive pools of capital controlled by foreign governments looking to invest cash accumulated from trade surpluses.) It turns out many took huge positions in American financial institutions at about the worst moment possible:

SWFs have also proven to be poor market-timers, as many of them plunged deeply into stocks in 2007 and 2008 and were effectively taken to the cleaners by American financiers. Singapore's Temasek just sold at a huge loss the stake in Bank of America it had acquired via a $4.4 billion investment in Merrill Lynch. The Abu Dhabi Investment Authority in November 2007 invested $7.5 billion in Citigroup, buying preferred stock convertible into common stock at prices in the mid-$30s. Citi's stock today trades for less than $4. In March 2007, China Investment Corp. bought $3 billion in stock of Blackstone at about $28 per share. Today, Blackstone trades at about $11 per share, meaning China's down about 60 percent on that investment.

It's not like we orchestrated the financial crisis to bleed the Chinese and the big oil producers. But I doubt too many U.S. policymakers are teary-eyed over the end of the sovereign-wealth fund boom. How large a stake a foreign government should be allowed to acquire in a major U.S company is just an incredibly fraught question.

Of course, it's clearly going to come back sooner or later assuming we keep running up trade deficits.

--Noam Scheiber

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