Sovereign Funds Invest Where Buffett Won't:
Michael R. Sesit
Commentary by Michael R. Sesit
Jan. 4 (Bloomberg) -- Sovereign wealth funds have been buying up
stakes in troubled U.S. and European money-center banks, brokers
and other financial institutions at such a rapid pace that you have
to wonder: Do they know something other investors don't or are they
just spending too much, too fast?
A few months ago, these funds were regarded as the bogeymen of
global finance, intent on using their affluence to acquire
strategic industries in the West. By year's end, they were its
Santa Claus.
In the past two years, sovereign wealth funds and Chinese
financial institutions invested at least $77.2 billion in Western
banks and money managers. About $66.6 billion of that was placed in
the last three quarters of 2007, accelerated by banks' needs for
capital infusions after being battered by the subprime- mortgage
crisis and related credit crunch.
The bigger deals include Government of Singapore Investment
Corp.'s $9.7 billion investment in Switzerland's UBS AG, and
Singapore-based Temasek Holdings Pte.'s 18 percent stake in
Britain's Standard Chartered Plc for $9.2 billion. The Abu Dhabi
Investment Authority paid $7.5 billion for a 4.9 percent holding in
Citigroup Inc., while Temasek invested $4.4 billion in Merrill
Lynch & Co. with an option to buy an additional $600 million of
stock. China Investment Corp. bought $5 billion of Morgan
Stanley.
With more than $2.5 trillion in capital, ``not too long ago,
these new masters of the universe were more feared than favored,''
says
Joseph Quinlan, New York-based
chief market strategist at Bank of America Capital Management. By
providing badly needed capital to banks and other financial
institutions, ``sovereign wealth funds emerged as a source of
financial stability rather than instability.''
`Complicated Messes'
Maybe so. But these giant piggy banks aren't charitable
institutions.
``We don't know why anyone would want some of these financial
institutions, as their franchises aren't worth much; and they have
big, complicated messes that won't be fun to try to unravel,''
Ray Dalio, Westport,
Connecticut-based president of Bridgewater Associates Inc.
with $150 billion under management, said in a late November
report.
Many banks make money playing the gap in prices, or spreads,
between different securities, currencies and interest rates. These
strategies, however, can be replicated without banks' large,
expensive overheads. ``We are all competing to create the most
efficient portfolios to make our spreads over our cost of funds,''
Dalio said. ``Why would you want a bank as your platform,
especially when the quality of portfolio managers working there are
those who built the portfolios that yielded these results?''
Bank Managements
The managements of these banks and brokers are nothing to cheer
about. Just look at their losses. And by taking minority stakes,
opting not to sit on boards and surrendering voting rights -- as
they have in several instances -- the funds are betting on the same
folks responsible for the red ink.
Bottom line: ``Owning a big American bank is a bit like owning a
big American automobile company, or a big American newspaper, or,
for that matter, the U.S. dollar,'' Dalio said. ``For all of them,
the memory of what it was carries a certain cache that tends to
make it trade for more than its real value in the modern
world.''
Perhaps the most telling evidence that sovereign funds may be
buying pigs in a poke is billionaire
Warren Buffett's rebuff to U.S.
financial institutions seeking cash infusions. ``So far, we have
not seen a deal that causes me to start salivating,'' the chairman
of Omaha, Nebraska-based Berkshire Hathaway Inc. said in a Dec. 26
interview on CNBC. Of course, Buffett isn't averse to all banks.
Berkshire Hathaway is the biggest shareholder in Wells Fargo &
Co. and the second-largest in M&T Bank Corp.
Insurer Ratings
Two days later, the company said it was buying the reinsurance
unit of Holland's ING Groep NV and setting up a company to
guarantee municipal debt in competition with existing bond insurers
struggling to retain their AAA credit ratings.
Sovereign-fund investments have focused on Western financial
institutions with large presences in emerging-market economies,
strong securities businesses and modern asset-management
capabilities, according to
Huw van Steenis, head of
banking and diversified-financials research for Morgan Stanley in
London. Much of the investment is predicated on expectations of
growing middle-class wealth, especially in Asia.
Initially, the investments look smart. The stocks are mostly
very liquid and cheap. Furthermore, the shares are often sold at
large discounts. Temasek purchased Merrill Lynch stock at a 12
percent discount to its share price a week before the investment
was announced.
Unknown Losses
Unlike most private-sector fund managers, sovereign funds can
also afford to be long-term investors. And being government
entities, they aren't required to constantly mark their investments
to market.
Even so, the stocks aren't cheap relative to the financial
sector's long-term valuation multiples, Dalio said. What's more,
Bridgewater says the full extent of bank losses isn't known. ``We
also believe that the credit problems that lie beneath the surface
are much larger and more threatening than the ones that have
surfaced,'' the firm said in a Nov. 21 report.
When a crisis hits, it's almost reflexive for financial
institutions to understate losses and postpone acknowledging
them.
Nonetheless, ``2008 will likely present the best buying
opportunity for high-quality financials in the last decade,''
Lehman Brothers Holdings Inc. said in a Dec. 7 report.
Three problems: One, figuring out which ones are high quality.
Two, in July, Lehman was wrong when it said the worst of the global
credit-market rout was over. Three, Dec. 7 isn't a very lucky date
in American history.
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this article appeared on 4 jan. good read.
