We have seen absoultely catastrophic losses at the world’s Sovereign Wealth funds in the Middle East, Singapore, Norway, you name it.  Add China to this list.  China’s State Administration of Foreign Exchange diversified its money out of Treasuries and agency debt at absolutely the worst time, running into a buzz saw as equity markets tanked.  Now they are sitting on huge losses. 

My highlighting is below.

China has lost tens of billions of dollars of its foreign exchange reserves through a poorly timed diversification into global equities just before world markets collapsed last year.

The State Administration of Foreign Exchange, the opaque manager of nearly $2,000bn (€1,547bn, £1,429bn) of reserves, started making huge bets on global stocks early in 2007 and continued this strategy at least until the collapse of the US mortgage finance providers Freddie Mac and Fannie Mae in July 2008, according to analysts and people familiar with Safe’s operations.

By that point Safe had moved well over 15 per cent of the country’s $1,800bn reserves into riskier assets, including equities and corporate bonds, according to people familiar with its strategy.

Safe never discloses its holdings except to the top Chinese leadership so it is impossible to know exactly how much it has lost from diversifying before markets crashed.

But judging from the subsequent fall in global stock prices and a conservative estimate that Safe held about $160bn worth of overseas equities, Chinese losses on those investments would exceed $80bn, or more than 50 per cent, according to Brad Setser, an economist at the Council on Foreign Relations in New York.

Total holdings of US equities by all Chinese entities reached $100bn by the end of June last year, more than triple the total of Chinese holdings in June 2007, according to an annual survey published by the US Treasury.

In mid-2006, Chinese holdings of US equities totalled just $4bn. Chinese investors are mostly barred from investing abroad and Safe is the only entity with the resources and the authority to make such large-scale offshore portfolio investments.

“Safe has built up one of the largest US equity portfolios of any foreign government entity investing abroad, including the major sovereign wealth funds,” Mr Setser said.

“It appears Safe began diversifying into equities early in 2007 and, rather than being deterred by the subprime crisis, it continued to buy.”

When one looks at Premier Wen’s recent comments about the safety of U.S. assets in the context of massive losses in our equity markets, it starts to make a little more sense. Effectively, the Chinese have gone from one poor investment to another as they have looked to invest their massive foreign reserves. Given the fact that China has accumulated these reserves because of an extreme imbalance of savings and investment between Asia and the West, one can see these imbalances as having ruinous consequences on all sides.

How the Chinese SWFs escape future losses is beyond me. But, obviously, they have no one to blame but themselves. No one forced them into building a huge arsenal of depreciating paper money.

Related posts:

• China cuts holding of U.S. Treasury securities
• China is now America’s largest creditor
• Abu Dhabi sovereign wealth fund loses $125 billion
• Will sovereign wealth funds pour yet more money into the West?
• The China gold announcement is not that significant

Sovereign Wealth Funds (SWFs) are losing money hand over fist, which should leave one wondering whether their appetite for Western assets will continue to bolster those markets. Funds in Asia and the Middle East have been hit by a double-whammy of losses on existing foreign asset portfolios and weak domestic markets due to the fall in oil prices in the Mideast and an absence of de-coupling in Asia.

Originally, it was the SWFs’ investment in western banks during 2008, which helped to forestall a poor outcome in the United States, Britain and elsewhere. However, the Lehman collapse in September ended further widespread investments by SWFs in American and European banks, resulting in an unpleasant outcome which I predicted in June of last year.

Nevertheless, demand for assets in the West has held up strongly.

International demand for long-term U.S. financial assets rose more than economists forecast in December as foreign investors bought the most corporate debt since June.

Total net purchases of long-term equities, notes and bonds increased to $34.8 billion, compared with net selling of a revised $25.6 billion in November, the Treasury Department said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $74 billion, compared with net buying of $61.3 billion the previous month.

Stock prices rose and the dollar declined in the final month of 2008, when the Federal Reserve cut its benchmark lending rate. Investors abroad flocked to debt issued by American companies.

But, will all of that change going forward? My answer is yes for two reasons. First, economic conditions in the home market where the largest SWFs are domiciled are truly awful. Governments cannot be seen allowing domestically-controlled funds to be diverted to foreign assets in such circumstances, the risk being social unrest. Witness Dubai, one of the seven emirates of UAE, which has seen an enormous property bubble implode. Even the ritzy Atlantis Hotel is laying off workers. You should note that Dubai has no oil wealth to speak of.

Investors and home buyers in the United Arab Emirates may default on payments for properties that have yet to be completed, creating a liability for developers of as much as $25 billion over the next two years, UBS AG said.

“We believe delinquencies on payment terms will be a growing concern over the next few years,” Dubai-based UBS real estate and construction analyst Saud Masud said in an interview. “In our view investors are and will continue to default as per individual risk profile.”

Dubai property prices have dropped 25 percent from their September peak as banks reduced lending and speculators left the market because of the global financial crisis, Morgan Stanley said. Dubai opened its property market to foreign investors in 2002, and Abu Dhabi followed three years later, fueling a boom that was boosted by low interest rates.

“Our assessment of leverage in Dubai’s residential property market is based on the cost to developers to finish properties should investors default on the upcoming supply of 140,000 units,” Masud said in a Feb. 15 interview. “We estimate this liability to be roughly $20-$25 billion over the next two years.”

Based on conservative estimates, 30 percent of Dubai’s residential properties may be vacant by the end of next year as the population falls and the risk of oversupply increases, Masud said. The strengthening of the dollar against the pound, euro, ruble and the Indian and Pakistani rupee will make property less attractive to buyers using those currencies, Masud said.

Emaar Loss

Emaar Properties PJSC, the largest real-estate developer in the U.A.E., on Feb. 12 reported an unexpected loss for the fourth quarter because of writedowns at its U.S. unit and falling prices at home. The net loss was 1.77 billion dirhams ($481 million) compared with a profit of 1.74 billion dirhams a year earlier. Emaar’s results missed UBS estimates by 20 percent, Saud said.

Moody’s Investors Service said Feb. 12 it may downgrade banks and government-owned companies in Dubai, the second-largest sheikhdom in the United Arab Emirates, if oil-rich Abu Dhabi limits support to its own institutions. The emirate may have to refinance $15 billion in debt due this year from its total debt obligations of $70 billion, according to Moody’s.

But, more than that, SWFs are still losing a lot of money in the investments they already made. The latest such revelation comes from Singapore.

Government of Singapore Investment Corp., one of two sovereign wealth funds owned by the island, lost as much as S$50 billion ($33 billion) in 2008, the Wall Street Journal said, citing two people familiar with the matter.

The fund doesn’t plan to get rid of its investments including in Citigroup Inc. and UBS AG even as asset values plummet, the newspaper said. GIC expects the two banks to provide substantial long-term returns, according to the report.

Sovereign wealth funds in Asia and the Middle East have pumped money into global financial institutions to help replenish capital eroded by writedowns and losses that have topped $1 trillion globally. GIC, overseeing more than $100 billion of reserves, has invested about $18 billion in UBS and Citigroup since December 2007.

GIC’s losses are similar to those at Temasek Holdings Pte, the city-state’s other sovereign wealth fund, according to the Journal. “GIC does not comment on speculative reports,” Singapore-based spokeswoman Jennifer Lewis said today by phone.

The value of Temasek’s portfolio shrank 31 percent in the eight months to Nov. 30 as the global stock-market slump eroded the value of companies from Barclays Plc to Merrill Lynch & Co., Lim Hwee Hua, senior minister of state at Singapore’s finance ministry, said on Feb. 10.

Temasek’s assets were valued at S$127 billion, down from S$185 billion at the end of March 2008, Lim said then. The MSCI World Index declined 38 percent over the same period in U.S. dollar terms. The benchmark tumbled a record 42 percent in 2008.

GIC, along with Temasek, reduced equity holdings amid the global downturn last year “early in the crisis,” helping the funds to post smaller losses than the MSCI World Index, Finance Minister Tharman Shanmugaratnam said on Jan. 19.

I see the weak domestic market and the heavy losses as a one-two punch for Sovereign Wealth Funds. While these funds may have continued to invest heavily in Europe and North America through 2008, I cannot foresee a similar asset allocation going forward. This lack of demand is a downside for markets n those countries.

Sources
Foreign Demand for U.S. Long-Term Assets Gained in December – Bloomberg.com
U.A.E. Real-Estate Defaults May Cost $25 Billion, UBS Says – Bloomberg.com
Singapore’s GIC Loses $33 Billion as Assets Tumble, WSJ Says – Bloomberg.com
Dubai resort The Atlantis stages most expensive launch party ever – Telegraph
Atlantis The Palm Dubai website
Atlantis lays off 70 staff – National

Related posts:

• Abu Dhabi sovereign wealth fund loses $125 billion
• China sovereign wealth fund diversifies into a massive loss
• Dubai bailed out by Abu Dhabi after property bust
• John Paulson: Distressed assets best opportunity in a lifetime
• Foreign investors dump Danske Bank

UPDATE: Given the recent news on AIG and HSBC plus the dividend cuts at KKR and PNC, I am re-posting this article.

Back in June before real panic struck, I outlined my thinking on the financial services sector in a post called “Financials: catching a falling knife.” My basic point at the time was that investors – especially sovereign wealth funds (SWFs) and hedge funds – were seriously underestimating future losses in the financial services. I suggested that buying financials was like catching a falling knife and that things would only improve when these investors gave up and went home.

Since that time, those investors have indeed given up after sustaining hundreds of billions in losses. Yet, their money is now being replaced by government money, which is propping up failing and bankrupt institutions. I see this as a problem, not a solution. However, it is unclear whether the new U.S. administration, the U.K. government, the German government, and the Irish government will continue this ill-fated policy response. If they do, you can expect things to get much worse.

Overlending and credit revulsion
Before I go into why these actions are not likely to succeed, I want to present a bit of background on financial crises.

What generally happens is this: many banks recklessly overlend as the economic cycle reaches a critical juncture. Soon thereafter, the banks start to incur losses which make plain the error in overlending. As a result, banks cut back on lending to the point that even solvent well-run businesses and individuals do not receive enough credit. This is called credit revulsion and is clearly where we are in the present business cycle.

The problem is this: banks made bad decisions that impaired their capital base. In a fractional reserve banking system (which actually has some similarities to a Ponzi scheme), a poor capital base creates distrust and, eventually, panic and insolvency for banks. Therefore, when credit revulsion occurs, banks must rein in lending to increase capital for fear of insolvency. It is futile to prod the banks into lending more. Credit revulsion has set in and their legitimate fiduciary responsibility lies with increasing capital to remain trustworthy and solvent. To be clear: those calling for banks to lend more fail to understand that banks do not lend when their capital base is compromised.

Re-capitalizing banks and pushing on a string
So, it is essential that banks be recapitalized in sustainable ways. There are a few ways this can be accomplished.

1. Banks can earn their way into a greater capital base by making money on the spread between borrowing and lending.  Marshall Auerback wrote a post demonstrating that the Fed is secretly trying to accomplish this (see Bank of America: Bailout hides huge bank subsidy deep in press release text).
2. Banks can sell assets – de-leverage.  The fewer assets they own, the smaller their balance sheet becomes and the less capital they need.  Banks are clearly doing this at present – particularly regarding exposure to the shadow banking system of hedge funds and other less regulated financial institutions.
3. Banks can receive additional paid-in capital from investors, either from the public sector or from private investors.  This is what we saw SWFs doing in 2008 and what the government is doing in bailing out banks now.  In fact, I see this as policymakers’ preferred vehicle for re-capitalizing institutions.  I am skeptical as to whether this is the right policy prescription.

However — and this is important – given the psychology of credit revulsion and the true need for additional capital, lending can only be undertaken when capital levels have returned to secure levels and when banks are relatively certain that future losses will also not impair capital, risking insolvency.  Trying to prop up institutions with fresh capital when hundreds of billions of dollars have yet to be written down is a losing proposition. The hedge funds, private equity funds and SWFs found this out in 2008, suffering massive losses in the process.  I anticipate that government will learn the same lesson in 2009 – hopefully before too much damage is done.

What does that mean? It means that lowering interest rates, engaging in quantitative easing, bailing out banks with guarantees and capital infusions will not increase lending significantly until the losses from the previous credit binge are fully accounted for. We may see some increase at the margin. However, in general, policy makers are going to be pushing on a string — their efforts will not be successful. They are merely sowing the seeds of future inflation and another credit boom-bust cycle.

Writedowns are the key
Now, imagine that you are a bank executive and you have become quite familiar with your loan book and asset-backed security exposure. You are worried that you may experience tens of billions in writedowns due to the souring of these assets. Then, the government comes and hands you a check for $10 billion. What are you going to do?

1. Go out and make tons of new loans hoping that the economy turns around so that they won’t go sour,
2. use the money to backstop losses as you modify current loans that are likely to sour and for which adequate collateral is not available, or
3. park some of the money as security against losses due to the economic meltdown and use some of the money to buy quality institutions that can bolster your capital.

I think you know the answer.  It is the same answer U.S. consumers gave when they received free money as tax rebates this past summer.  It would be irresponsible to take a flyer and start lending imprudently.  After all, isn’t that what got us here in the first place?

So, banks are waiting to figure out how many writedowns they will have to take on assets already on their books.  The level of those writedowns is key to increased borrowing. Having a reasonable hold on how many writedowns are to come gives an executive confidence as to how many new loans they can make and still have a strong balance sheet.

Question solvency because of the level of writedowns coming
Nouriel Roubini has just come out with an incredibly high figure of  $3.6 Trillion of expected total writedowns for the U.S. banking system alone.  If his estimate is even close to accurate,  then the U.S. banking system is effectively insolvent.  And we can reasonably expect this to be true elsewhere? What does this mean?  It means that government are injecting capital into many insolvent institutions. Is RBS solvent? Is Hypo Real Estate solvent?  Is Citigroup solvent?  is Allied Irish Bank solvent?  Should the governments of the U.K., Germany, the U.S., and Ireland be giving these companies money or liquidating them?  The answer to these questions is far from clear.

What is clear is that propping up insolvent institutions presents a moral hazard issue.  Moreover, it also lengthens and deepens recession.  How?  Say you are a bank executive at a well-run institution and another bank comes to you for a 30-day loan.  Do you give them the money?  How do you know they will be around in 30 days?  What about yourself – don’t you need the money?  How do you know you won’t need to go cap in hand to the government for a bailout at some point down the line?  You don’t.  That’s why you don’t lend.  That’s why some good companies might need to go bankrupt due to lack of funds.

This is one specific way that doubt and uncertainty create a downward spiral.  Fear creates an environment in which it is extremely difficult to discern the difference between illiquidity and insolvency.  Propping up bankrupt institutions only increases doubt and fear, adding to the economic death spiral.

What needs to be done is to comprehensively review financial institutions in a way that makes clear which are insolvent and which are not. Once this issue is taken care of, solvent institutions can be induced to lend if they are infused with enough capital to reasonably cover capital needs for future writedowns of assets already on the books.

As we move forward, you should be watching to see if policy makers understand these facts. If they do not, they will be bailing out insolvent institutions – and taxpayers will be catching a falling knife. We would expect writedowns to increase further from unnecessary dead weight economic loss, lengthening and worsening the recession. While this recession will be deep, it is not too late to keep it from becoming catastrophically so.

Sources
Roubini Predicts U.S. Losses May Reach $3.6 Trillion – Bloomberg.com

Related posts:

• A few thoughts about the banking crisis response in the United States
• Citigroup: Panics, Banking Confidence, Bailouts and Fractional Reserves
• Asymmetric information and corporate governance in bank bailouts
• Roubini: Nationalization “fully on the table” in Geithner’s Plan
• Mark to market is beside the point

In my book, losing a gargantuan $125 billion qualifies you as the dumb money.  This appears to be what has happened at Abu Dhabi’s leading Sovereign Wealth Fund.

I had been warning all throughout 2008 that the Sovereign Wealth Funds were making a big mistake in buying stake in western financial services companies. Now, they are paying the price.

Abu Dhabi Investment Authority may have lost $125 billion last year, pushing the sovereign wealth fund to second place behind Saudi Arabia after the global credit crisis cut asset prices, the Council on Foreign Relations said.

Abu Dhabi’s fund was “hard hit by the recent fall in global equities,” economists Brad Setser and Rachel Ziemba wrote in a report released on the New York-based organization’s Web site. “A high allocation to equities, emerging market and private equity” contributed to the drop.

Erik Portanger, a spokesman for the Abu Dhabi Investment Authority, declined to comment. The Associated Press first reported the estimates yesterday. Abu Dhabi is the richest of seven states that make up the United Arab Emirates.

The worst financial crisis since the 1930s Great Depression has led to almost $1 trillion in losses at banks and financial institutions worldwide, helping drag the benchmark S&P 500 U.S. share index down 39 percent in 2008. Gulf sovereign wealth funds have invested billions of dollars in financial institutions. The Kuwait Investment Authority last January paid $3 billion for a stake in Citigroup Inc. and invested $2 billion in Merrill Lynch & Co. Abu Dhabi’s Investment Authority bought a 4.9 percent stake in Citigroup for $7.5 billion in November 2007.

Remember, this is the people’s money here. $125 billion has gone up in smoke. I see this as true mismanagement of a country’s wealth. I wonder if anyone is going to take the fall for this.

Source
Abu Dhabi Wealth Fund Lost $125 Billion, Council Says – Bloomberg.com

Related posts:

• China sovereign wealth fund diversifies into a massive loss
• Sovereign wealth funds cut exposure to U.S.
• Will sovereign wealth funds pour yet more money into the West?
• Chrysler building: is the Middle East the new Japan?
• Barclays taps Sovereign Wealth Funds

Lehman Brothers is obviously desperate to avoid Bear Stearns’ fate. The FT is reporting that Lehman held secret talks with foreign investors to sell up to 50% of the company. Previously, I thought one investor might be the Korea Investment Corporation, but it turns out the investors are the Korean Development Bank and Citic of China.

In the first week of August, Lehman held parallel talks with the government-owned Korea Development Bank and China’s Citic Securities at its headquarters in New York’s Times Square area.

The South Koreans discussed a two-step process under which KDB would buy a 25 per cent stake directly from Lehman and another 25 per cent of the shares though a market tender.

The price under discussion was 50 per cent above Lehman’s book value. The two sides were said to have been close to a deal but last-minute disagreements torpedoed the talks.

Simultaneously, Lehman met top executives of Citic Securities but these talks never reached the level of detail of those with the South Koreans.

-FT, 20 Aug 2008

I’m sorry , but there is absolutely no way that deal would fly with U.S. regulators. Citic, the Korean Development Bank? Are you kidding me? The Germans are looking to impose a 25% restriction on foreigners. The last time I checked these two outfits were state-owned. Why would Lehman think that they had a snowball’s chance in hell of getting a 50% deal with foreign governments? From a protectionist standpoint, the Feds have to worried enough that China, Japan and the Middle East own so much Fannie and Freddie paper. Their taking a controlling stake in a major U.S. investment bank is one step too far. I can see Chuck Schumer right now: “How dare those Asians.”

In the end, Lehman will need to get bailed out if things don’t turn around quickly enough. And with Fannie and Freddie imploding as we speak, Ben Bernanke and Hank Paulson have quite a mess on their hands.

Ben, its time to get out your helicopter. America needs some cash.

Update: The WSJ is reporting that the Fed pulled in Credit Suisse to ask them about rumors that Credt Suisse was pulling its credit lines to Lehman.

In an apparent attempt to prevent a repeat of the cascading rumors that helped sink Bear Stearns Cos., the Federal Reserve last month quietly called one major bank to see if it had pulled a credit line from Lehman Brothers Holdings Inc., people familiar with the matter said.

Responding to a July rumor that Credit Suisse Group planned to pull a line of credit to Lehman, Federal Reserve officials called to see if it was in fact true, according to these people. Credit Suisse told Fed officials there was no truth to the rumor and it had no intention of pulling the line of credit, the people said.

-WSJ, 21 Aug 2008

We now see the Fed is very worried about Lehman Brothers becoming the next Bear Stearns.

Related posts:

• Will Lehman be bought on Sep 13th?
• Lehman Brothers: no buyers yet
• Barclays gets “core Lehman” assets
• Lehman was bankrupt
• Is Lehman the next Bear Stearns?

With sovereign wealth funds (SWFs) trolling the world for decent places to park their overflowing coffers of cash, the Germans have decided to stop them before they start.

The German government has approved legislation that would enable it to prevent foreign buyers from taking big stakes in key domestic companies.

The measure applies to investments of 25% or more by buyers outside the EU or European Free Trade Association.

Designed to protect national champions from the hands of sovereign wealth funds, it is likely to be criticised for being protectionist.

The legislation requires approval by parliament before it can become law.

Germany is keen to prevent sovereign wealth funds, which are government-controlled investment funds, from taking control of the country’s strategic assets

-BBC News, 20 Aug 2008

Last time I looked, no major announcements of Sovereign Wealth Funds about to take over Lufthansa, Deutsche Bank, or BMW had been made. What gives here? Are the Germans just making sure that German Banks don’t try the same type of SWF-funded bailout that UK, Swiss and U.S. banks have been forced into?

It’s only a matter of time before we see the same type of protections in the U.S. or the UK. After all, many a pundit was appalled when even those sneaky Belgians got their hands on Anheuser-Busch. I’m surprised we haven’t seen calls of this nature in the U.S. already. If an obviously capitalist company like InBev’s purchase of a brew house can raise protectionist hackles, a state-owned investment fund from Asia or the Middle East would be seen as that much more sinister.

Protectionism is clearly on the rise.

Related posts:

• The Germans guarantee all savings deposits
• Abu Dhabi sovereign wealth fund loses $125 billion
• The Germans get tough with the state banks
• Germans reject Chinese offer for Opel
• GM considers keeping Opel, raising capital

Apparently, Lehman Brothers was looking to strike a deal with a Korean Sovereign Wealth Fund (SWF) for a whopping $5 billion, but the deal fell through — this according to the NY Post.

Lehman Brothers’ embattled Chief Executive Dick Fuld nearly struck a deal to raise almost $5 billion from South Korean wealth funds and institutions but the pact disintegrated, according to sources familiar with the matter.

It’s unclear why the deal fell apart earlier this month, although one source speculated that Lehman was aiming to raise more capital than the Korean investor was willing shell out at the time.

The precise terms of the deal could not be learned.

-NY Post, 20 Aug 2008

The Post doesn’t name names, but I have a sneaking suspicion that we are talking Korea Investment Corporation (KIC). KIC took a $2 billion preferred stock stake in Merrill and converted them into common shares just at the end of July, so it could be they are not looking to increase their exposure to U.S. financial institutions just yet.

Without Asian and Middle Eastern SWFs, where would Western banks be? In Lehman’s case, we are about to find out.

Related posts:

• Disappearance of capital sources is true cause of Lehman failure and AIG rescue
• Lehman tried to sell a 50% stake to foreign governments
• Why Lehman failed
• Lehman gets $2.15 billion for Neuberger Berman
• Lehman Brothers: no buyers yet

Sovereign Wealth Funds (SWFs), which played such a vital role in the recapitalization of U.S. financial institutions during the first go around, are looking to cut their U.S. exposure.

Basically, the U.S. is running an extremely inflationary monetary policy with Fed Funds at 2% and inflation at 5%. The Dollar has therefore lost value relative to currencies like the Australian DOllar, the Euro, the Swiss Franc and so on. The Gulf States like Kuwait and Saudi Arabia have their currencies pegged to the U.S. Dollar. So the expansionary U.S. policy is exporting inflation into the Middle East.

They are experiencing inflation of as much as 25-30%, to the point where expats down in the gulf are finding it difficult to get apartments. There is a building boom going on in places like Dubai the likes of which have never been seen. This is clearly out of control. What to do?

Kenneth Shen, head of the strategic and private equity group at Qatar Investment Authority, another Middle Eastern fund looking to do more deals in Europe than the US, aired such concerns publicly at a conference in Hong Kong late last year. “The outlook for the U.S. dollar is a significant issue for investors contemplating US-related investments,” Mr Shen said.

These money managers are very concerned about the value of their investments. However, more draconian policy shifts are in the offing if the U.S. dollar continues to sink.

Behind the scenes, fund officials are questioning the credibility of the Federal Reserve and U.S. Treasury in defending the dollar and maintaining financial stability. Reacting to last year’s collapse of structured investment vehicles, the head of one Middle East fund said: “I thought the problem of off-balance sheet had gone away with Enron.”

Kuwait last year ended its currency link to the dollar, raising questions about whether other oil-rich Gulf states with similar arrangements would follow.

The largest of the sovereign wealth funds, the Abu Dhabi Investment Authority, is still committed to the dollar. ADIA’s subsidiaries make their investments without taking into account currency risks. A separate ADIA division then decides whether to hedge or not.

As long as the United Arab Emirates – which includes Abu Dhabi – pegs its currency to the dollar, a major departure from the current investment policy is unlikely. Moreover, ADIA staff say they worry that the euro may be at a peak against the dollar.

Still, dissatisfaction with the dollar peg is growing at the Abu Dhabi fund. “We are suffering. We are importing inflation for no reason,” says one ADIA staffer.

It is only a matter of time before other Middle Eastern countries see the benefit of switching to a currency basket. The relative appreciation in their currency from re-pegging some of their basket to Euros and Yen would certainly halt the rise in inflation. This would leave money managers free to invest in Euro-denominated assets and protect their returns.

These moves would cause the dollar to lose value and interest rates in the U.S. to rise irrespective of what the Fed does. This is yet another reason the low interest rate policy of the Fed is not in America’s best interest.

Source
Sovereign funds cut exposure to weak dollar, FT, 17 Jul 2008

Related articles
Qatar becomes Barclays’ biggest shareholder, FT, 18 Jul 2008

Related posts:

• Abu Dhabi sovereign wealth fund loses $125 billion
• The latest dollar rout revealed
• Will sovereign wealth funds pour yet more money into the West?
• China sovereign wealth fund diversifies into a massive loss
• The Dollar

If you haven’t heard yet, you will soon. The Chrysler Building was snapped up by the Abu Dhabi Investment Council (otherwise known as the government of a foreign country). With the U.S. still sporting a current account deficit over 5% of GDP, foreign countries around the world are piling up dollar bills in their coffers. And they are getting sick of buying treasurys.

The Abu Dhabi Investment Council has bought the landmark New York skyscraper, the Chrysler Building, for 800 million dollars, sources close to the deal said Wednesday.

Media reports had said the Abu Dhabi Investment Council, an investment fund based in the United Arab Emirates, had been holding negotiations with a subsidiary of Prudential Financial Inc. over its 75 percent stake in the renowned Art Deco building.

“We have sold our stake of 75 percent on Tuesday,” Prudential spokeswoman Theresa Miller said.

The 77-story Chrysler Building, one of New York’s best-known skyscrapers, is 25-percent owned by Tishman Speyer Properties, a privately held New York real estate firm.

-Agence France Press, 9 Jul 2008

Although we have friendly relations with the United Arab Emirates, of which Abu Dhabi is a part, one cannot help but see this as a ‘Pebble Beach’ style purchase. The same forces that blocked the purchase of Unocal by the Chinese oil company CNOOC and ended the Dubai Ports World ownership of U.S ports will see this purchase in a jingoistic way, fueling anti-foreigner sentiment.

The purchase may or may not be a good investment for Abu Dhabi, but where else are they to invest their dollars? This is all too reminiscent of the Japanese purchase of Pebble Beach in 1990. The Pebble Beach purchase marked the top of the market for Japanese real estate. The Japanese economy went into a major depression right after and the owners of the golf course ended up selling for a major loss.

Nevertheless, the Pebble Beach acquisition came to symbolize everything that was wrong with foreign investment in the U.S., souring U.S.-Japanese diplomatic relations. Given the climate in the U.S. today, the risks are much the same for this investment.

Related posts:

• Abu Dhabi sovereign wealth fund loses $125 billion
• Dubai bailed out by Abu Dhabi after property bust
• China sovereign wealth fund diversifies into a massive loss
• Sovereign wealth funds cut exposure to U.S.
• Will sovereign wealth funds pour yet more money into the West?

The Financial Times’ blog Alphaville is reporting today that those investors who ponied up for shares in financial institutions after the financials wrote down billions and needed additional capital – those investors – lost $10 billion! Basically, its like throwing good money after bad. Investments in many of these institutions is dead money until the writedowns stop.

Investors who backed the recent drive by U.S. financial companies to raise capital are sitting on nearly $10bn in paper losses amid a continued slump in the sector’s shares, an FT analysis shows. The negative returns suffered by investors are likely to make it more difficult and expensive for U.S. financial groups to tap equity markets if, as expected, they are forced to raise more capital. Investors who bought the $65bn-plus in common and convertible shares issued by large U.S. financial institutions since last October have seen their total investments fall by more than $9.7bn – a negative return of about 15% – according to an FT analysis of Dealogic data.
-FT Alphaville, 16 Jun 2008

When individuals, sovereign wealth funds and institutional investors stop giving these institutions more capital, the bottom will fall out of the financial services sector, and we will reach capitulation. As a result, some institutions will fail. But, at that point, the surviving institutions will be very cheap. Then, the financials will be screaming bargains and that is the time to buy.

The reason we have not reached bottom is that investors refuse to believe that more writedowns are to come (see link here). I have said time and again that the level of writedowns due to mortgage credit losses will continue to be underestimated because so many do not understand the magnitude of the bubble which has created this problem. The losses will not be limited to subprime RMBSs (residential mortgage backed securities). They will encompass Alt-A and some prime loans as well. These losses and writedowns have yet to occur.

Moreover, there will be a negative feedback loop with the real economy from the balance sheet deleveraging. This will actually create more writedowns. The full measure of real economy-related credit losses have yet to be realized. Other areas where writedowns may occur include CRE (Commercial Real Estate), Construction Loans, Leveraged Loans, Credit Card and Auto ABSs (Asset-backed securities), High Yield corporate debt and sovereign debt.

The Lehman Brothers debacle began the second writedown phase. Most commentators assumed that the collapse of Bear Stearns and its rescue by JP Morgan Chase spelled the end of turmoil. However, financial institutions are carrying significant exposure to other asset classes on their books.

This is one reason regional financials in the US, especially in the Midwest among institutions like KeyWest, Fifth Third and National City have been hit. This is also why UK banks and house builders have suffered of late. Investors are waking up to the international nature of the crisis, understanding that writedowns in the UK, Spain and Ireland have yet to occur. Whether Canada and Australia’s bubbly markets join suit in due course remains to be seen.

So, my advice is to sit tight and wait for signs that the bottom has finally fallen out of these stocks and that investors have capitulated. Then, there will be a lot of companies worth buying.

Investors hit $10bn loss in U.S. financials

Investors who backed U.S. financial companies’ drive to raise much-needed capital are sitting on nearly $10bn in paper losses amid a continued slump in the sector’s shares, a Financial Times analysis shows.

The negative returns suffered by investors are likely to make it more difficult and expensive for U.S. financial groups to tap equity markets if, as expected, the credit crunch forces them to raise more capital.

“Raising funds from equity investors is becoming increasingly complicated because the performance of financial stocks during and after the spate of fund-raisings has been so abysmal,” said a Wall Street banker who advises institutions.

The setbacks suffered by equity investors come as sovereign wealth funds – a rich source of capital at the beginning of the crisis – have moved to the sidelines after seeing the value of investments fall in companies such as Citigroup, Merrill Lynch and Morgan Stanley.

Investors who bought the $65bn-plus in common and convertible shares issued by large U.S. financial institutions since last October have seen their total investments fall by more than $9.7bn – a negative return of about 15 per cent – according to an FT analysis of Dealogic data.

Those who took part in the $1.2bn recapitalisation of the bond insurer Ambac last March are nursing paper losses of more than 70 per cent. And fund managers who backed a $1.2bn capital raising by fellow monoline insurer MBIA have seen their investment shrink by 60 per cent.

Shareholders in Citigroup who thought that the sharp fall in the stock made last month’s $4bn share issuance a buying opportunity face a 24 per cent loss.

Of the 20-plus fund raisings by U.S. banks and insurers since the onset of the crisis, only two – by the student loan provider Sallie Mae and the regional lender Sovereign Bancorp – show a small positive return.

See: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

Related posts:

• Measuring P/E Ratios for Financials
• Investors finally balk at giving banks more capital
• Financials: catching a falling knife
• UBS writes down another $5 billion
• Structured Credit downgrades

The FT reported today that Brazil, fattened by newly found oil reserves and a sky-high oil price, is getting into the Sovereign Wealth Fund (SWF) game. They are ready to fund $200 billion toward this project and have built up the currency reserves to begin making that move.

To date, most SWFs have been in Asia or the Middle East. Now, add Latin America to the list of regions with resource- and cash-rich countries able to start their own state-sponsored bankrolls. On the other hand, the U.S. over-leveraged itself in a financial orgy whose chickens are coming home to roost in the form of a gaping current account deficit, low interest rates for savers, high inflation and a weak currency. The dollar has weakened and interest rates remain below the inflation rate in the US.

So, foreign governments, holding massive amounts of dollars in their central banks’ coffers, are looking to get a little extra bang for their buck than low-yielding U.S. treasurys can provide.

As the U.S. debt crisis becomes ever-more severe, more U.S. institutions are likely to go cap in hand for a bailout from foreign SWFs. Hey, maybe Lehman can get bailed out by the Brazilians. Instead of a Latin American debt crisis, it looks more like a North American debt crisis today.

Talk about coming full circle.

The Brazilian government plans to use revenues from newly discovered oil fields to create a sovereign wealth fund containing as much as $200bn-$300bn in the next three to five years, Guido Mantega, finance minister, has told the Financial Times.

Mr Mantega said a bill to create the fund would be sent to Congress as early as this week under a fast-track system that gives legislators a maximum of 45 days to consider the bill and approve or reject it.

The SWF would initially resemble a fiscal stability fund, setting aside 0.5 per cent of gross domestic product, or about R$14bn ($8.6bn, €5.5bn, £4.4bn), as a counter-cyclical contingency reserve. It would invest in locally issued government debt, reducing the debt held by the private sector and in effect lowering the net burden of public debt, currently about 41 per cent of GDP.

“The fund will start small but once the oil begins to come in it will grow quickly, to $200bn or $300bn in three to five years,” Mr Mantega said in an interview on Friday.
-Financial Times, 9 Jun 2008

Related posts:

• Quote of the day: Gordon Gekko – greed is good
• Abu Dhabi sovereign wealth fund loses $125 billion
• Sovereign wealth funds cut exposure to U.S.
• Will sovereign wealth funds pour yet more money into the West?
• China sovereign wealth fund diversifies into a massive loss

The Sunday Telegraph is reporting yet another major Western bank is going cap in hand to sovereign wealth funds in order to stave off the inevitable crisis. This time its Barclays, Britain’s third largest bank. At a time when RBS is issuing a massive £12 billion of fresh capital by tapping its beleaguered shareholder base, Barclays must have decided it needed to go another route if it is to have success raising capital.

Executives at Barclays, Britain’s third-largest bank, are in advanced talks with overseas government-backed funds to secure a capital injection of more than £3bn.

The lender has stepped up talks with investors from China, Abu Dhabi and elsewhere in the Middle East and Asia as it looks to follow its peers by recapitalising its balance sheet.

Advisers to Barclays said this weekend that it wants to tie up the new capital within the next few weeks. The bank’s strong preference is to raise capital from sovereign wealth funds rather than through a rights issue.

China Development Bank, which already owns a small stake in Barclays, is among those with which the British lender is in talks as it comes under pressure from investors to boost its tier-one capital ratio.
-Sunday Telegraph, 08 Jun 2008

UK banks have been at the forefront of the credit crisis with HSBC, RBS, Barclays, Bradford & Bingley (B&B), and Northern Rock each being shaken by events. Northern Rock was nationalised after the first run on a British bank in more than 150 years, while Bradford & Bingley was stung by the downturn in the UK buy-to-let market. HSBC, RBS and Barclays have each suffered massive losses stemming from the U.S. subprime debacle.

Yet, the credit crisis has yet to hit the UK with full force. HBOS and Lloyds TSB have gotten off relatively lightly of the top five banks. However, other than B&B no other major British financial institutions have signalled they are ready to write-off millions in the UK domestic mortgage market.

After the huge sell-off on Wall Street on Friday due to turmoil at Lehman Brothers and with the unemployment rate, investors have to be nervous about UK financial institutions and their exposure to further write-offs and losses.

One should also note that Barclays seems relatively under-capitalised at a paltry 5.1% Tier 1 ratio. Six percent is the minimum standard in the U.S. to be considered well-capitalised. Expect many more write-offs in the UK in the months to come.*

Sources
Barclays lines up sovereign wealth funds for cash boost, Telegraph, 08 Jun 2008
List of banks in the United Kingdom, Wikipedia
De-leveraging redux, Credit Writedowns

See other blog entries under the label UK for more on the crisis in Britain. The Blog UK Bubble covers the UK daily and is well worth a visit.

See also: Other posts under the label ‘UK.’

Related posts:

• B&B gets its money, HBOS and Barclays don’t
• Abu Dhabi sovereign wealth fund loses $125 billion
• Will sovereign wealth funds pour yet more money into the West?
• Sovereign wealth funds cut exposure to U.S.
• Barclays raises £4.5 billion from Asia and Mideast

The financial services sector has been reeling from over $300 billion in writedowns due to the credit crisis that has spread globally. I expect further losses to hit this sector in the U.S. due to commercial real estate, credit cards, auto, Alt-A mortgages and an inadequate levels of reserves for bad debt. Moreover, losses are due to spread to Europe, especially for British and Spanish investment houses. Ultimately, another major financial services bankruptcy is likely.

David Rubenstein agrees. Last week, Rubenstein, the founder of the famous Carlyle Group private equity firm was quoted by Bloomberg as saying he thought the credit crisis had legs and was far from over. He doubts whether further huge writedowns will lead sovereign wealth funds (SWFs)to invest again with the same exuberance. The article begins:

U.S. and European banks and financial institutions have “enormous losses” from bad loans they haven’t yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said.

“Based on information I see,” it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn’t name any companies.

“The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,” Rubenstein said. “Many financial institutions aren’t going to be able to survive as independent institutions.”

Rubenstein said sovereign wealth funds are becoming wary after losing $25 billion on their investments in struggling banks and securities firms worldwide.

Financial institutions worldwide have recorded $329.2 billion in credit losses and writedowns and raised $246.6 billion in capital since the beginning of 2007. Rubenstein said about $60 billion of that capital was provided by sovereign funds last fall, and their investments today are worth about $35 billion.

-Bloomberg News

Apparently, Carlyle, which saw the collapse in February of one of its hedge funds, Carlyle Capital, is also looking elsewhere for future bets. In particular, they have targeted the federal government and defense industry in a huge purchase from Booz Allen, the consultancy. Bloomberg News says:

Carlyle Group, the private-equity firm run by David Rubenstein, agreed to acquire Booz Allen Hamilton Inc.’s U.S. government-consulting business for $2.54 billion, its biggest buyout since the credit markets collapsed in July.

Booz Allen, based in McLean, Virginia, will split off its corporate-consulting unit into a separate company, Carlyle said today in an e-mailed statement. Booz Allen Chief Executive Officer Ralph Shrader will run the Carlyle-owned entity focused on government clients. Carlyle and Booz Allen had been in talks since at least January.

The purchase would be Carlyle’s biggest since it agreed to buy nursing-home operator Manor Care Inc. last July for $6.3 billion. Deal-making may be rebounding from a 68 percent decline in the first quarter as investment banks begin writing new commitments for private-equity transactions. Buyouts ground to a halt last year because of a global credit freeze triggered by record U.S. subprime-mortgage defaults.

“The private-equity firms are not going away,” said Steven Kaplan, a professor of finance at University of Chicago Graduate School of Business. “They have too much capital.”

The Booz Allen government-consulting unit has more than 18,000 employees and annual sales of more than $2.7 billion. Its clients include branches of the U.S. military, the Department of Homeland Security and the World Bank.
-Bloomberg News

Carlyle seems to be diversifying away from the epicenter of the bubbles in the U.S. and Western Europe. In April, Bloomberg News also reported that the private equity group was looking in the Middle East for new investments.

To continue attracting investors, Carlyle needs new markets. Last year, Carlyle began raising a $750 million Middle East fund — its first — that aims at taking stakes in local family-owned companies or doing buyouts.

“We were early in Europe, early in Asia and hopefully early here,” Rubenstein said in an interview in December in Dubai. “Now we have to prove we can do the deals.” So far, Carlyle hasn’t announced any.
-Bloomberg News

David Rubenstein and Carlyle are very shrewd despite the hedge fund implosion which sullied their reputation. Given Rubenstein’s public statements about the potential for future losses in the financial sector it may be best to avoid this sector altogether. There are lurking time bombs waiting to explode.

Sources
Carlyle to Acquire Booz Allen Unit for $2.54 Billion, Bloomberg News, 16 May 2008
Rubenstein Says `Enormous’ Bank Losses Unrecognized, Bloomberg News, 12 May 2008
Carlyle Scrounges for Buyouts in Dubai as Rubenstein Rues Fund, Bloomberg News, 23 Apr 2008

See also: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

Related posts:

• Abu Dhabi sovereign wealth fund loses $125 billion
• $35 billion in missing writedowns
• Latest additions to Credit Crisis Timeline
• Additions to Credit Crisis Timeline: 02 June 2008
• Writedowns hit $500 billion