Today UBS becomes the second high-profile bank to be forced to tap sovereign wealth funds in order to shore up the holes in its balance sheet. A number of commentators have attacked this from various angles: should we be worried that ARABS ARE BUYING CITIBANK!!! or "Is sovereign wealth the new hedge fund management?"
To me, it highlights just how much of this crisis is a liquidity problem. Defaults are obviously a big problem. But if we knew exactly how big a problem it was going to be, we could deal with it: banks would take the write down, some investors and companies would go under, more would be forced to merge in order to shore up their capital base, and the economy would weather the storm. Instead, you have a situation where deals can't be done because people aren't even willing to take a guess at the value of the securities in the balance sheet. Banks appear to be taking write-downs that are more aggressive than they have to, both so that they can reassure the markets of their credibility, and (presumably) so that they can hand stock owners a happy upside earnings surprise at some point in the future when they "discover" their CDO problems were not as bad as they'd initially believed.
The sovereign wealth funds are stepping in, not because they're The Future of Finance, but because right now, they're the only investors who are liquid; they have a guaranteed source of revenue (oil, taxes) that doesn't depend on the financial markets. They're getting some terrific bargains at fire sale prices right now, which will probably pump up their balance sheets for years to come. But I doubt they'll ever be the colossus that stands astride the world. Global capital markets have just gotten too big for one player, or one type of player, to dominate for very long.
You need to use your media connections to find out for us who the mystery Middle East investor is. They've only confirmed the identity of the Singapore fund.
Or perhaps they are scared to death of doing jail time if their estimates are wrong. Pretty good incentive to low ball profits.
If the government has to step in to bail out the banks, S&Ls, etc. I hope they do a better job than RTC did. I moved back to Houston at the bottom of the oil bust in the mid 80s. We ended up banking at a new, locally owned bank. They ended up a middle sized bank due to the RTC handing them large numbers of loans and other assets of banks and S&Ls that were being liquidated. Our officer told us that while doing their due diligence on the packages, they determined that many of the institutions being liquidated would have been fine in a couple of years with a middlin' injection of cash - they were in a liquidity trap. Instead, the RTC had a firesale - because Congress wanted the problem solved quickly - and banks like his made out like bandits.
Hope this doesn't happen now.
BTW, if the mortgage holders do end up freezing the rates on ARMs, how about requiring the mortgage holders to owe the bank (or the government if they foot the bill) a portion of the capital gain on the home when it is sold. If the government subsidizes the loan companies, they out to cough up warrants, like Chrysler did.
Yep, it's having liquidity at the right time
I am not really worried about sovereign wealth funds. A few will get great deals, but - much like the unfolding of the S&L crisis - when people see what a killing there is to be made buying up distressed assets, there will be money flowing back into mortgage bonds at new lower prices/higher yields.
It's not that there's no liquidity, it's that people are scared to park their money. There's plenty of money out there. The soverign wealth funds almost have to invest boldly - what are their alternatives - get 4% on a 10 year US Treasury; buy a German Euro bond yielding 4.3%, not,they are investing for the future of their countries and can't afford to be timid
I think Citibank's Chuck Prince' experience might be a clue on how not to handle the situation. It cost him his job. And the Saudi's were already there. Al-Waleed bin Talal by all accounts was not amused by the multiple write downs. So it makes sense to err on the high side. Then again, maybe they really aren't on the high side if no one really knows the extent of the mess.
"Global capital markets have just gotten too big for one player, or one type of player, to dominate for very long."
True, but, still, the value of SWFs, $3 Trillion, is a lot, of which only 3 or 4 players dominate--that is a lot of money (and a lot of power, but I realize that libertarians pretend that money doesn't equal power--even though, funnily enough, the next post is about how only rich, private school kids go to Harvard.) Private Hedge Funds only account for $2 Trillion.
Numbers come from here:
http://www.imf.org/external/pubs/ft/fandd/2007/09/straight.htm
"Banks appear to be taking write-downs that are more aggressive than they have to, both so that they can reassure the markets of their credibility, and (presumably) so that they can hand stock owners a happy upside earnings surprise at some point in the future when they "discover" their CDO problems were not as bad as they'd initially believed."
This is a nice statement, in the general. Though, could you provide the name of a specific institution?