America for Sale?

I guess Lou Dobbs is going to have to change his rhetoric. Evidently we need not worry about illegal Mexican immigrants or Chinese world domination right now. After the deals announced earlier this week, it’s time to turn our xenophobic and protectionist attention to the Arabs!

Of course I am saying this partially tongue-in-cheek, but it is clear that some nations around the world reap the windfall of large trade surpluses, high oil prices and the foreign exchange that comes from currency transactions, many Asian countries and oil exporters hold more reserves than they need. Governments are putting pressure on their central banks to earn higher returns than those on the safe, liquid Treasury securities that most hold and as a result have established “sovereign-wealth funds” as a means to invest in a variety of assets across the globe.

The latest splash by a sovereign fund was the deal announced earlier this week between Citigroup and the Abu Dhabi Investment Authority (ADIA), the investment arm of the Abu Dhabi government. Citi, which has been suffering from subprime woes, received a $7.5 billion capital infusion from ADIA, in exchange for convertible stock in Citi yielding a rich 11% annually. The ADIA stake in the US’s largest bank will amount to 4.9%, exceeding the position held by Saudi Prince Alwaleed bin Talal, long known as one of Citi's largest shareholders and one of the key players in ousting Citi CEO Chuck Prince last month.

For paranoid types, it may be a little unnerving that 8% of Citi is now held by Arabs, but it is not the first institution to benefit from foreign investors. Beleaguered Bear Stearns cut a deal with Chinese investment bank Citis Securities to shore up liquidity; DIC, the investment arm of Dubai Holding (a conglomerate owned by Sheikh Mohammed bin Rashid al-Maktoum) plunked down more than $1 billion for a 9.9% stake in Och-Ziff Capital Management Group, a U.S. hedge-fund manager and this week bought a stake in Sony.

All of this activity is going to catch the attention of those who are already anxious about foreign investment in the US, but weren’t these the same people who were worried about Japan purchasing American assets in the eighties? It is clear that the world is shifting and the capital that is flowing is a natural extension of those changes. Assuming that there is no national security interest involved, I can’t see why investors would not want to see the trend continue.

To some extent, the genie is out of the bottle: according to the Financial Times, investment funds from the Middle East and Asia have invested an estimated $37 billion in shares of western financial companies this year and Morgan Stanley predicts that sovereign-wealth fund investments will grow to $27.7 trillion by 2022 from about $2.5 trillion today.