The alliance between China’s (nominally) communist government and Wall Street deepens …
The China investment corporation (the CIC) is investing $5b in Morgan Stanley, taking a 9.9% stake.
That is a bit of a surprise, at least to me. After the CIC's (mark to market) losses on Blackstone, I expected the CIC to shy away from similar high-profile, visible stakes — especially ones that risk further losses. I got that wrong. Very wrong.
I apparently am not the only one who was surprised. Keith Bradsher reports:
[The investment in Morgan Stanley by] China Investment Corporation … also marks an abrupt shift in strategy for the $200 billion fund, and underlines the extent to which the government fund appears to be under the direct control of China’s leaders.
Lou Jiwei, the fund’s chairman, said in a speech at a financial forum on Nov. 29 that the fund sought liquidity and would mainly invest in financial instruments like index products. Mr. Li also said that the fund, which has fewer than two dozen employees, would start hiring foreign experts before making more overseas investments.
….The investment fund declined to comment late Wednesday on its acquisition of nearly 10 percent of Morgan Stanley. But a person familiar with the fund’s activities said that the decision had been sudden and little expected by the fund’s staff.
“I am also surprised,” said the person, who insisted on anonymity because of the sensitivity of the deal. [Emphasis added]
I can see why the fund's staff was surprised — in late November, Lou Jiwei seemed to indicate that the CIC wasn't yet ready to make a large investment in a major financial institution. This kind of investment wouldn't have been made without the approval of China's State Council — not after Blackstone. Indeed, Bradsher's reporting suggests that the impetus for the deal came from the State Council rather than the CIC's staff.
It presumably has been vetted by the Treasury and the US regulators as well. The FT reports "it had been discussed with the US authorities “at the highest level”
I am much less keen on this kind of investment than the Street — or my friend Michael Pettis. Morgan Stanley needs the capital, no doubt. And if Abu Dhabi's government can hold a large stake in Citi, and Singapore's GIC can hold a large stake in UBS (together with an unnamed investors in the Middle East) and Temasek can own a large stake in Standard Chartered, it is hard to argue that large government stakes in US and European banks are verbotten.
China would argue that the CIC's minority stake in Morgan Stanley is no different than the minority stake private US and European firms (Goldman, Bank of America, RBS) have taken in the large Chinese state banks.
Basically, the CIC could argue that it some grand sense, it has swapped a stake in ICBC with one US financial institution for a comparable stake in another US financial institution. The CIC's stake in Morgan just remedies an existing discrepancy between US investment in China and Chinese investment in the US.
The CIC's big stake still worries me — in large part because the CIC also owns three of the four large Chinese stake banks, and is expected to own two others (the Agricultural Bank of China and China Development Bank) after the recapitalization. And there is no doubt that the state banks have been managed in part to achieve non-commercial goals.
China's banks have historically been used to implement China's version of industrial policy — directing credit to favored sectors of the economy. That likely still happens, though credit is no longer being allocated to support as many loss-making industrial dinosaurs.
Right now, though, the state banks are being used to achieve another Chinese policy goal: the low cost sterilization of China's huge reserve growth. The banks are effectively forced to buy sterilization bills, both through various regulations that limit their lending and more informal pressure. They will likely be forced to buy the Finance Ministry bonds sold to finance the CIC's foreign exchange holdings — and probably to buy them on non-market terms. The bonds have a low coupon (well below the current inflation rate) and a long duration , and Chinese rates are expected to rise. They are not exactly something the banks want to hold right now.
In various ways, the fact that the government owns the biggest banks has made it far easier for China to sustain its current exchange rate regime by passing some of the costs of maintaining that regime over to the banks.
No doubt, the CIC's investment in China's state banks (or really Huijin's investment, which the CIC bought at book) has been very profitable. The market value of these banks has soared. But so long as the state banks are used to achieve policy goals, it is hard to argue that CIC assets are managed for purely commercial goals.
Here, the China Investment Corporation differs from Abu Dhabi's Investment Authority. Its mandate is much broader — and includes managing the state's stake in China's own banking system and supporting the outward expansion of Chinese firms.
The CIC's stake in Morgan Stanley falls short of control, to be clear. And there is no reason why the CIC's couldn't manage its offshore assets differently from its onshore assets. I though would be a lot more comfortable if the CIC was buying the S&P index, not significant stakes in large — indeed iconic — US firms.
The irony here is immense.
A few years ago the consensus view in the US financial community was that China's state would have to relinquish control of Chinese banks in order for China's financial sector to develop. State ownership was generally considered an impediment to a modern financial system. But rather than selling controlling stakes in China's state banks to Wall Street firms, China's state is now buying (non-controlling) stakes in Wall Street firms.
Talk about a change.
There was a time not-so-long ago when the US was on a push to export its form of government (and its form of capitalism) around the world. Remember when the US was criticized for using the IMF to foist privatization on the world? Now both the US government and large Wall Street firms rely heavily on non-democratic governments for financing — and the US is, in a limited sense, importing other countries form of capitalism. The US government hasn't historically owned large stakes in US banks and broker-dealers.
UPDATE: The FT story suggests this deal has been in the work for months and — according to Lazard's Gary Parr who advised the CIC: "The investment is structured in a creative way that protects CIC’s downside.” It other words, it wasn't rushed like Blackstone — which was pushed through in a few weeks. If so, Lou Jiwei plays a good game of poker. In late November, Lou signalled that large Chinese investments in US and European banks were still a year away:
Lou Jiwei, the head of China Investment Corp, said on Thursday he would like to emulate sovereign wealth funds that have invested in large western financial institutions hurt by the credit crisis, but that such investments were still a year away.
The FT also emphasizes the tie between Morgan Stanley's Wei Christianson and the CIC's Gao Xiqing from their time as securities regulators in Hong Kong and China helped move this deal along. Regulators turn deal makers …
UPDATE 2: A couple of scale metrics. $5 billion is 1% of the likely foreign asset growth of China's state in 2007, counting central bank reserves, CIC foreign assets and the increase in the foreign assets of the state commercial banks. And if Logan Wright is right, $5 billion is less than 5% of the $120b in foreign exchange China may have forced the state banks to hold to meet their reserve requirements in q4. It isn't that much money, relative to the stunning growth in China's foreign assets.
UPDATE 3: The Wall Street Journal writes that the 9% return on the CIC's convertible bonds far exceeds China's 5% cost of funds.
"The terms of the Morgan Stanley deal guarantee CIC a 9% annual return, well above the fund's 5% cost of funding until it converts its investment to shares in 2010."
That is true, but only if you ignore the currency risk. And I don't think it really makes sense to ignore one of many elephants in the room. Right now the market expects the RMB to appreciate by around 8% a year (the appreciation over the last 12 months was around 6%). If that expectation is realized in 2008 - and the RMB continues to appreciate by more than 4% a year through 2010 – the terms seem to me to guarantee that China will lose money if Morgan Stanley's stock doesn't rise in value. The dollar coupon won't cover the CIC's renminbi interest bill, net of the dollar's depreciation.
I was also — incidentally — pleased that Stephen Green of Standard Chartered was as surprised as I was by this deal. I don't feel quite as alone. I really thought the scars from Blackstone would push the CIC toward adopting a more conservative initial investment policy.
I am delighted that some people with brains AND good sense may be getting involved in Wall Street. I think having to go hat in hand to the Chinese is a very very good lesson to the USA. I’d be happy to have the Chinese own as much of us as we own of the world. It’s a two way street now and if you are so stupid as to stumble over your own stupidity, then I say let more sensible people pick you up.
as Wall Street is ultimately driven by its (non-transparent) clients, and as those clients include ‘China’…
for all the folks who make 20%, someone/thing else is taking 80
doesn’t ‘Wall Street’ have any number of stakes in China’s ’state’ and ‘commercial’ banks and firms (some of which are many decades old), whether or not ‘Wall Street’ might include BNP Paribas’s 20% stake in China’s Nanjing City Commercial Bank, along with the International Financial Corporation’s 15% holding of the same http://en.wikipedia.org/wiki/BNP_Paribas#_note-0
whether ‘China’s investments may be a means of seeking the support it needs to continue propping up its’ relatively more rickety financial system
“I though would be a lot more comfortable if the CIC was buying the S&P index, not significant stakes in large — indeed iconic — US firms.”
I am curious about this comment: what exactly makes you uncomfortable about the MS investment?
thanks.
I find it ironic that Jim Rogers, who is bullish on China’s prospects, is also warning anyone who will listen (see link below) to avoid U.S. investment banks (such as Morgan Stanley, I presume). Is China shooting themselves in the foot with this latest move?
“Why Wall Street Bonuses Aren’t All That”
http://boom2bust.com/2007/11/29/why-wall-street-bonuses-aren%e2%80%99t-all-that/
sources of discomfort:
a) the CIC’s ownership of Chinese banks that are used as an instrument of policy –
b) its mixed mandate, which includes promoting the outward expansion of Chinese firms (including some who might compete with morgan stanley … tho there is a case that different parts of China’s government will team up with different US/ european firms as they compete against each other, so CIC may own one i-bank and ICBC may partner up with another as it expands … ). it isn’t a purely commercial player.
c) the CIC’s highly politicized decision making (see Bradsher’s reporting above). It is as if the US cabinet is making investment decisions
d) the difficulties created when one government owns a large stake in a firm regulated by another government
e) the fact that the CIC is taking this stake before China has committed to any standards for SWF transparency — or for that matter, the timely and transparent disclosure of its reserve growth. indeed, a lot of recent chinese policy decisions (requiring the banks to meet their reserve requirements in $ without stating so publicly) go against transparency in state/ firm relations.
f) a general discomfort with the idea that China’s government investment decisions will shape the allocation of capital across the US economy even more than they do now … (and i fully recognize low rates fueled by Chinese purchases of bonds have induced their own distortions)
and perhaps, less nobly, a bit of discomfort with the united states status as a huge net borrower than relies on subsidized financing from other governments and what that means in a lot of different respects …
Brad- I share some of your concerns about CIC or some other organ of the Chinese state forcing US companies to make non-economic decisions. But given the amount of dollars we have exported to the rest of the world, and the unwillingness of foreign central banks to buy any more of our toxic paper, isn’t the next step for them to be taking large equity positions in blue chip US companies?
The political clout of the chinese communist party on top of the current bottomless greed and absence of morality of Wall Street. Another GREAT short-term money fix for WS top-ranking executives.
From wikipedia: “Decadence can refer to a personal trait and to a state of society. Used to describe a person’s lifestyle, it describes a lack of moral and intellectual discipline, or in the COD : `a luxurious self-indulgence`. In a society, it describes corrosive decline due to a perceived erosion of necessary moral traditions. (A society that discards unnecessary and outmoded values would not be considered decadent. Although perceptions of “unnecessary and outmoded” significantly vary.) Due to arguments over the nature of morality, whether a society is decadent or not is a matter of debate, though certain historical societies (such as ancient Rome near its end) are generally held to have been decadent, as decadence often leads to objective decline.
Decadent societies are often prosperous but usually have severe social and economic inequality, to such a degree that the upper class becomes either complacent or greedy, while the lower classes become hopeless and apathetic. The middle class may exhibit either or both patterns, or it may vanish entirely. Poor leadership is generally held to be both a cause and a symptom of decadence, as the lifestyle of a decadent individual is usually considered to be incompatible with responsibility. Applied to the arts, decadence implies an elevation of self-indulgence and pretension over effort and talent; when applied to science and the professions, it describes an erosion of professional ethics. Individual or collective greed is generally disliked in societies with strong moral beliefs, and for this reason, societies that nurture it are sometimes accused of decadence.”
…
Contemporary post-industrial societies such as the United States and Western Europe are sometimes accused of decadence, the argument being that consumerism, materialism, and selfishness have eroded traditional moral values of community, democracy, and the work ethic.
I suspect the fear of Chinese investment is knee-jerk jingoism wedded to dismay at the economic decline of the US, in great part due to its own stupidity. Stupid people lose long term, and so do stupid nations.
anonymous — i would rather China/ others take a stake in the index than in specific companies to get their blue chip exposure. And I am not sure the CIC will push US firms into non-economic decisions; it may well not. It does though introduce the possibility — and the fact that part of the CIC’s portfolio is managed in non-commercial (or not fully commercial) ways raises concerns, even if it is not cleat the CIC could ever exercise comparable control outside of china over institutions other parts of the state do not also regulate.
And the state as owner introduces complications into the state’s role as a regulator — both in China vis a vis Morgan Stanley — goes MS now get an edge inside China — and in the US. Suppose Morgan Stanley goes bust a la Northern Rock … allowing a financial firm to fail is inevitably a political decision (assessing illiquidity v insolvency is hard), and the decision about how existing equity is handled is always hard. It gets harder if the owner is a government that the USG deals with on a host of issues — especially if the investment stems from a high profile decision of the state council. It is those more subtle effects that worry me, along with the possibility that the decisions the CIC makes about what US firms get money and which ones don’t will influence the internal allocation of capital in the US even in the absence of formal control.
all that said, the more general point stands: the US has a problem — it has a deficit that it can no longer finance by selling housing bonds.
“A predicted golden age for distressed debt hedge funds has so far failed to materialise in spite of the global credit crisis, but 2008 should be their year. “You ain’t seen nothing yet… According to Moody’s Investor Service, the global “junk” bond default rate was at a 26-year low of 1 percent in November… some banks have already started selling some of their worst loans at a discount to their face value…” http://uk.reuters.com/article/fundsNews/idUKNOA85019920071218
Brad,
We Chinese should worry about this. This deal apparently is initiated by MS. Given the long history and deep network of MS in China, it will clearly be described as the corrupted US bankers bribed China corrupted officials to save their a** and waste Chinese money.
bsetser: “And the state as owner introduces complications into the state’s role as a regulator — both in China vis a vis Morgan Stanley — goes MS now get an edge inside China — and in the US.”
This concern is reasonable.
I think it is significant that they are buying these stakes in troubled financial companies rather than, say Chrysler. It suggests to me that they are looking for strategic partnerships with Morgan-Stanley and Blackstone in other parts of the world.
MSF is down more than 26% today
MSF is down more than 26% today
Written by Guest on 2007-12-19 13:05:38
This is just a lie.
Guest:
“…knee jerk jingoism”? I think not. We are not talking just China here; how about the 4 or 5 families in the Middle East–not exactly democratic–and how about Russia? Putin’s choice of his successor reveals a great deal, I think: Former chairman of Gazprom’s Board of Directors.
Instead of just slinging the mud, try thinking through the philosophical implications.
In terms Australia and China: How about Australia selling off 15 billion worth of power generators?
As we approach crunch time in terms of both energy and the environment, governments will start to position themselves…and they are doing precisely that.
The “iconic” financial institutions, those who made enormous sums from the credit fiasco, are now being forced to release real control to state/country driven investment.
As far as America is concerned, it paid little attention to the ultimate consequences of its lack of any coherent policy, either in terms of regulations at home or in terms of long-range policy decisions abroad.
The Chinese, the Russians, the ME—even Brazil—have played the game intelligently. America with its laissez-faire brand of capitalism—can’t even have a coherent energy policy.
For those who think large socialistic/communistic bureaucracies will simply stumble as they once did…I do not see that happening.
The game has shifted from the Cold War. The side that “lost” has re-thought its position and game plan. The board itself has changed. New game.
It would be an interesting exercise to list the purchases and growth of state-owned corporations or financial institutions.
take your pick: http://www.globeinvestor.com/servlet/Page/document/v5/data/stock?id=MSF-N&pi_sponsor= which was still reading -26.74% a couple of minutes ago, or: http://online.wsj.com/public/quotes/main.html?type=djn&mod=mdc&symbol=MSF - although both showing the same proximity to a 52 week low…
Jin — given that the deal seems to have come from the state council not the CIC (at least not its staff), your concern about how this deal came about is reasonable … and I think that is the other 1/2 of my concerns. A bit more transparency would help here — the CIC seems to be making a decision that is inconsistent with the informal guidance it has given (index funds, now hiring managers, nothing til the spring, etc). But so long as the guidance is informal, it is hard to show that something was done in a less than above-the-board way …
It isn’t at all clear that the majority of the Chinese population is as keen as the state council to invest in prestigious US financial companies — whether ones in a bit of trouble or ones whose owners are looking to cash out.
why you make the point these are “non-controlling” stakes and then proceed to treat them as controlling.
“”Irrational” domestic spending from the $150 billion stabilization fund could fuel further inflation and make the economy once more dependent on the whims of global oil markets, Pyotr Kazakevich, the official in charge of the fund, warned on Tuesday…” http://www.moscowtimes.ru/stories/2007/12/19/002.html
Two points:
1. It’s a $5 billion injection into a market badly in need of cash. The decision may benefit China in the long term in many ways, but in short term, it’s an action in support of markets and the US financial system.
2. The Chinese are investing into US companies, unlike Japanese who bought real estate. The Chinese see themselves more as part of the players of this system, rather than Japanese who thought themselves outside of the system.
As for the concerns, all decisions in this global market are influenced by politics. We just need to factor in political issues when doing benefit/cost analysis. The Chinese are pragmtists and if their current state directed capitalism becomes a detriment in their development, they will change the it. The US went through periods of laissez faire and political activism during its development. No reason to believe the Chinese will be any different.
guest — fair point, i need to be more careful.
legally, 9.9% and no board seat isn’t a controlling stake that requires CFIUS review. in practice it probably makes the CIC one of Morgan Stanley’s biggest shareholders, if not its biggest shareholders. That provides a degree of informal influence, I would assume.
I don’t realistically think it would allow China to use Merril the way it uses the domestic banks. I do think it probably gives the CIC some influence, informally.
And I am a bit concerned that the CIC/ China are going forth before they have adopted policies that will bring their surplus down … $5b is about 1% of the foreign asset accumulation of China’s state.
the speed with which China has gone from buying safe treasuries and agencies (setting the currency risk aside) to buying direct stakes in leveraged US firms (financial firms are intrinsically leveraged) is to my mind breathtaking. The CIC’s stake in Blackstone/ morgan now probably exceeds their holdings of simple index funds and the like …
Incredibly, very few care about the outrageous growth of governments in the last few years. Several years ago it would be absurd to assume it is OK that governments would be the major shareholders of private enterprises. Isn’t government ownership of resources socialism? What am I missing? How can anything like a Sovereign Wealth Fund be considered a good thing by any person who even remotely values liberty and private property rights?
LC: one other distinction — the Chinese government is buying US companies, while private japanese firms bought US real estate. The Chinese government is far closer to US firms than it is to the US government, or the US security community. With Japan, it was the opposite — US firms worried about Japanese firms, who they competed against, and the US had a security alliance with Japan.
one question perhaps being why (or if) direct stakes in leveraged US firms may now look less risky, or relatively more ‘profitable’ - or ’secure’ in financial or political terms - to them than investments in safe treasuries and agencies, or their own economies.
Brad:
Actually, when Japanese companies were buying US Real Estate, US security community had an adverse reaction too. Remember all those books about potential conflicts with Japan?
Our relationship with China is changing too. Back in late 70s, there was no business relationship but the security relationship was rather cozy because of the Soviet threat.
The point is that in an evolving relationship, there will always be tensions and how successfully we manage them is key. Confidence in the US itself will help and right now that’s a rare commodity.
Brad,
The decision itself is not inconsistent. I remember there is an article after Citi deals in ft.com. The director of CIC is reportedly to say that CIC would like to make the similar deals like citi and ubs. The projection of investing in index fund and mutual fund is mainly the concern of avoiding political heat. Citi deal fundemantally changes that view. However, this did not take the domestic reaction into consideration. Given the blackstone deal, they will have a hard time to justify this deal in China, though the deal itself is smarter this time.
Guest on 2007-12-19 14:02:54:
One rather simple answer: buy low, sell high. The US financials are now pretty cheap. The subprime crisis won’t be that bad (or we hope). If not, then it’s really bad news for everyone.
One other thing that’s implicit in my previous posts: The Chinese are taking a stake because they have almost no finanical market expertise. They’re buying in to learn and establish their management framework.
Mike M,
Forget the ideology nonsense. Nobody wants to destroy you unless you attack others first.
[quote]China’s banks have historically been used to implement China’s version of industrial policy — directing credit to favored sectors of the economy. That likely still happens, though credit is no longer being allocated to support as many loss-making industrial dinosaurs.[/quote]
Actually this isn’t true. Banks have been used to direct credit to continue worker social welfare payments and avoid social unrest, but this was in the absence of any other mechanism to provide a government safety net.
Chinese banks haven’t been used to execute industrial policy in the way most people define it in the last 20 years or so. China’s economy has always been much too decentralized for industrial policy to be effective.
LC,
I do not think you can obtain know how by CIC investing in MS. You can only learn it from doing it. Most Chinese financial institutions are lack of knowledge to participate in international financial markets because they are not exposed to the international market in the past. They are equiped pretty well to deal with domestic market. They will learn to train their staff and recruit professionals as they have larger portfolio.
Jin:
Actually, a board seat on MS gets you access to a lot of things. This will be an educational opportunity for the Chinese.
One thing that made China and the Soviet Union very different was that Chinese state industry was organized by geography whereas Soviet industry was organized by industry. What this meant that it was relatively easy for the Soviet government to say “produce more cars” since you have a Ministry of Heavy Industry. It was relatively hard for the Chinese government execute industrial policy because a lot of the industry was under the control of the provinces and local governments. making it really hard to move resources from one industry to another.
The Chinese government flirted with the idea of industrial policy in the late-1980’s but basically gave up on the idea after Japan’s collapse in the early 1990’s.
Also, while the State Council’s approval was necessary, it’s not necessarily the case that the SC pushed down this deal. These sorts of deals are typically negotiated with very small teams on a need to know basis.
“Actually, a board seat on MS gets you access to a lot of things. This will be an educational opportunity for the Chinese.”
The CIC is not getting a board seat or any other special ownership rights.
Jin — my memory of that FT article is that the Lou said they would like too do similar deals, but wouldn’t be ready for another year or so given staff constraints. The Bradsher quotes certainly suggest a degree of surprise. I guess I need to look up the Ft.com article.
bsetser - A few years ago the consensus view in the US financial community was that China’s state would have to relinquish control of Chinese banks in order for China’s financial sector to develop.
That was the consensus view of economists in academia and in agencies like the IMF or the World Bank. People who work in the financial markets usually don’t have very strong views on how to structure markets, since having strong views tends to bankrupt you if they turn out to be wrong.
According to the global savings glut thesis, China is one of the prime drivers of the US current account deficit and low interest rates. This combined with some very exuberant Wall Street financial innovation led to subprime mortgages, CDOs, and general financial market excess. You reap what you sow - in both directions - China and the US. If China’s excess savings delivered shock and awe liquidity to the financial system, its surgical equity strikes are the cleanup operation. China’s unflinching sponsorship of state capitalism should be no surprise - it complements China’s unflinching sponsorship of official foreign exchange intervention and reserve accumulation. And with all of this, one should recognize that the 10 per cent ownership level delineates a financially demilitarized although very risky ‘no man’s land’.
anonymous1 — well said. like “demilitarized” but risky “no man’s land”. does any know if Morgan Stanley will have any larger shareholders?
china didn’t actually end up buying much subprime in round 1; other looking for yield after yields on treasuries and almost as safe agencies collapsed did. but no doubt the flow of funds into the debt market from china created the conditions that led to the excesses. now in a sense china is taking a leveraged bet that subprime will recover - at least relative to its current levels of Morgan stanley’s book.
Not long ago, people here suggested that the US monetary policy is designed to deal with US economy. If it leads to the loss in the rest of the world, then too bad but the rest of the world shuold just accept it.
Now China is one of the prime drivers of the US policy? Hey, if you claim honors when there is a profit, then accept shames when there is a loss. Don’t point finger at others.
happy christmas.
in 1251 a.d. monke, great khan of the mongols and grandson
of genghis khan, inherited an empire which had issued written
promises that were in effect a form of paper money. the paper
bore undertakings to pay in silver and silk and other commodities.
the great khan’s administration was that age’s equivalent of a
superpower in a considerable amount of debt.
monke’s predecessor guyuk was a spendthrift. some advisers
wanted monke to repudiate the debts. why not ? they had the
power to devastate all of asia and part of europe if anyone
dared to complain.
but monke honoured the debts, going against the customs of
the times, whereby one king was not bound by the promises
of another. he reasoned that otherwise the merchants of
other countries would no longer be willing to do business with
the mongols.
he also moved to regulate the issuance of paper money, using
central control to prevent the overissue of paper and erosion
of its value through inflation.
so how far have we come since 1251 ?
far from being a free lunch, a paper or fiat currency needs the
trust of the merchants as one of its essential ingredients. if a
brutal horde of horse archers from the steppes of mediaeval
mongolia felt constrained to avoid undermining their own paper,
what has changed that would allow a modern and civilised
nation to consider doing it ?
debasement of a currency is a course of action that runs along
the cliff edge of discredit. perhaps the united states is changing
course ? forget about talk of decadence. if paying up was in
the self interest of the mongol hordes, perhaps even wall street
can see the logic of it ?
the united states’ elite is not monolithic, either. perhaps some
members take satisfaction in selling off wall street wise guys to
the chinese ?
and by the way - that’s ‘worthless’ ‘helicopter’ ‘confetti’ that is
about to buy out some very choice assets. the chips on the gambling table are real money.
[quote]And the state as owner introduces complications into the state’s role as a regulator — both in China vis a vis Morgan Stanley — goes MS now get an edge inside China — and in the US.[/quote]
Not sure that is the case. It’s not clear to me why the PBC or the CBRC would show favoritism to MS versus Goldman who has a stake in ICBC or Bank of America which has a stake in CCB.
it will clearly be described as the corrupted US bankers bribed China corrupted officials to save their a** and waste Chinese money.
jin,
I am ignorant of China but I was surprised by your comment. I would think that the Chinese would look with pride and glee as ,one by one, titans of US finance capitalism come with hat in hand to beg the Chinese people for money. To me the image is not that of corrupt partners but boss and subordinate. How do you think the rest of Asia will react?
I would like to recommend to the readers of the blog the writings of Thomas P.M. Barnett, a strategic globalization thinker who is a former Pentagon think tank type. I believe he is on the road speaking right now, so he may not be publishing his take on the MS investment for a couple of days. Here is the link to his blog.
http://www.thomaspmbarnett.com/weblog/
NC Jim ,
We will judge things based on results. Blackstone right now is the only example, which turns out to be a bad one. Thus, it is natural that the soundness of the MS deal will be questioned, given the credit-crisis-background and the scale of the deal. There is always corruption speculation in government business(A ft.com piece talked about some personal relationship behind the deal.). The only thing positive is that MS is a big name. However, the fact that MS needs this amount of money shows that the company is in big trouble. The impression will probably be that the price is inflated. That CIC cannot name directors is another sign that China is robbed/cheated by West this time again. If these comments make it to the official media, you will know how huge the political pressure the CIC managers bear.
Regard to the rest of Asia, Japan already talks about its own SWF. GCC and Singapore are pioneers. You would expect other countries begin to follow suit, i.e. India, South K…
NC Jim: I would think that the Chinese would look with pride and glee as ,one by one, titans of US finance capitalism come with hat in hand to beg the Chinese people for money.
Different Chinese will care about different things, but the main concern is “does the deal benefit China economically?” If it doesn’t make China any money, then there is nothing to be proud of, and if it loses China money, then I think that CIC is going to be in big trouble.
One thing that should be pointed out is that China didn’t buy a straight equity stake. They bought a set of convertible securities that will pay constant interest for a few years and then be convertible to stock.
jin: If these comments make it to the official media, you will know how huge the political pressure the CIC managers bear.
The good thing is that the political pressure in this case pushes CIC in the direction of commercial profitability. CIC’s first priority is going to be to make a profit, and everyone in China is going to be looking at it.
Interestingly I don’t think that there will be nearly that much interest or political pressure on CITIC with its swap for Bear Stearns.
China already has a stake in minimizing instability in US financial institutions. Five billion could be cheap if it helps to maintain “confidence” in US financial markets and keeps a lack of liquidity from turning into insolvency.
One other thing, I wouldn’t put too much emphasis on personal connections as a determining factor in decision making here. Everyone at that level of finance knows everyone else (went to the same school, worked at the same place, went to the same conferences, eat at the same restaurants etc. etc.) There are no doubt close connections between CIC and MS, but there are also likely to be equally close connections between CIC and other potential purchase targets and between MS and other buyers.
In this respect, China is very different from the Soviet Union. The big dates are 1977, when China started sending large numbers of students overseas and then around 2000/2001 when these returned students suddenly made in into positions of power within China.
Also information tends to be very compartmentalized in finance firms. The CIC-MS deal is likely to be a surprise to most of the people at CIC, just like it is to be a surprise to most people at MS. The reason why is that they don’t want an information leak that goes through a staff member to their friend at the Financial Times before the deal goes through.
I’m sure that the deal had to get the approval of the State Council, but I’m also sure that the deal has to get the approval of a whole bunch of regulators on the US end. There’s no reason to think that the State Council’s role in this is different from the role of the US regulators.
Also the “State Council” is a generic term for China’s central government administration. Saying something has gotten the approval of the “State Council” is more or less analogous to saying that something has gotten the approval of the “Executive Branch” of the US government.
CIC is one of about fifty ministries and administrations under the State Council, and I think that there is this impression that Wen Jiabao woke up one morning thinking that it would be a good idea to buy Morgan Stanley, phoned up Lou Jiwei and it was done. Bureaucracies just don’t work this way.
In practice, I suspect that what happened on the Chinese government side mirrored things that were happening on the US government side.
It all is a bit shocking, even if it’s “only” just 10%, but hardly unexpected. Isn’t this just a boomerang effect of persistent defecits? These dollars were bound to come hurtling back at the US in one way or the other.
I am 100% sure this is a carefully calculated move on behalf of the brains behind CIC, and a long term position at that. They’re not after making a quick buck, no way. But it is in everyones interest that these big financial institutions keep ticking over. Not just because they are American, but because the alternative would be too dangerous for most economies.
It does make your hair stand on end though, doesn’t it?
“…Ms Christianson, a US trained lawyer, joined Morgan Stanley in Hong Kong after serving with the local securities regulator in Hong Kong, the Securities & Futures Commission. She followed Mr Mack when he moved to Credit Suisse and left when Mr Mack stepped down. After a brief period with Citigroup, she rejoined Morgan Stanley when Mr Mack returned. She has known top officials at the CIC, such as Gao Xiqing, for years. Mr Gao, who graduated with a degree in law from Duke University in the US, was at the China Securities Regulatory Commission for years before moving on, first to China’s social security fund and then to be head of investment at the CIC itself. In spite of its losses in the fourth quarter, Morgan Stanley said it would have remained well-capitalised in terms of its regulatory requirements even without the investment from CIC… he did not believe there were any political or regulatory implications with the investment, but added it had been discussed with the US authorities “at the highest level”… CIC officials say they are under pressure to get money invested out of China…” http://www.ft.com/cms/s/0/3dd7a570-ae66-11dc-97aa-0000779fd2ac.html?nclick_check=1
The imbalances just keeping getting worse and the responses are simply more state involved capitalism instead of market adjustment. This is not a good situation for global stability in the long run.
The greater the involvement of the state the less efficient allocation of resources. Maybe the US should just debase the dollar so badly that China goes beserk and collapses. They dont seem to be interested in playing by market rules and cherry pick the ones they like. Macro Man has mentioned this many times.
Are the Chinese going to force the world to have continuous low rates forever? IF thats the case we should just crank up the bad debt machine again. We could have a game show where people are given credit to spend and the bill is paid for by the Chinese government. Anyone who thinks that capital markets are working in the way they were originally intended is insane.
One of the more interesting articles on Gao Xiqing is here
http://query.nytimes.com/gst/fullpage.html?res=950DE1DD143EF93BA15756C0A96F948260
There may be some differences but in the U.S. the commercial banks are the Fed’s lieutenants. Of course the Fed didn’t stop their real estate based lending binge because that is exactly what Fed intended them to do. They are the tools for the Fed to pump in liquidity and conduct monetary policy. Okay it is a subtler form of control but it is control nevertheless. Of course the Fed is obligated to bail out the largest ones. Talk of moral hazards is nonsensical in this context because they did exactly what Fed had asked for.
Now swapping equities between the two countries may not appeal to the free marketeers, but it at least should add a stabilizing element to the long term relationship. Call this interest “non-commercial” or whatever. BTW, if now is not a good time to buy a bank then when is it? When they are selling at higher multiples? MS is considered shoulders above other investment banks, other than GS. Equity investment requires much longer time horizon than our dear host seems to contemplate. There is no reason to believe the BX investment is a failure because as of yet there is no way that you can even buy a stake in BX of that size (equal to the current float). If they paid premium for BX now they are getting back in the form of a discount on MS.
Shrek: Anyone who thinks that capital markets are working in the way they were originally intended is insane.
I think there is confusion between stereotypes about how capital markets are supposed to work, and how capital markets actually do work.
In particular, in pretty much all developed economies including the United States, the state is very heavily involved in creating efficient markets and also very heavily involved in interacting with market actors. Most of that intervention is very quiet and indirect, and no one notices or complains in the absence of a crisis.
For example, one reason Wall Street is awaiting sovereign wealth funds is that Wall Street is very used to dealing with them. When there is a major bond issue or an IPO of stock, the first people the sales people call up are the state retirement pension funds to give their sales pitch and road shows.
Similarly, I am amused by the idea that the US has this very impersonal capital market which runs completely by the invisible hand. Wall Street is a very personal place where handshakes and social relations are very important.
HZ: Of course the Fed didn’t stop their real estate based lending binge because that is exactly what Fed intended them to do.
Also the Fed isn’t set up to be an “attack dog” agency. The relationship between the banks and the Fed is too close for the Fed to serve in that function. The SEC and the state banking regulators are the “attack dogs” but subprime mortgage slipped through the cracks.
One final point. No one designed the current system. It evolved. Complex systems that are designed systems generally don’t work that well. The ones that do work better evolve and evolution is a process that doesn’t end.
“They grew up during China’s Cultural Revolution, when Mao Zedong’s brutal political campaigns in the 1960s and 1970s tore apart families, pitting children against their parents and husbands against their wives. Today, they are some of the most powerful deal makers in China… Every major investment bank now has a Chinese-born star banker… They are mostly in their 40s, born in China and educated in the United States…” http://www.iht.com/articles/2005/07/19/business/banker.php
“The Chinese, the Russians, the ME—even Brazil—have played the game intelligently. America with its laissez-faire brand of capitalism—can’t even have a coherent energy policy.”
***************
I find it odd you should think I am “slinging mud” by pointing out that the US having to sell off it assets is due to its own lack of intelligence and good sense when that is exactly what you say too. When the chickens come home to roost there is always a lot of squawking.
Shrewd? Canny? Bold? Or perhaps just plain naive. Who can tell? Whatever the a-priori belief it is unlikely that the Chinese - whatever the prowess or omniscience some may wish to attribute to them - will do better than the average stockpicker, or for that matter, better than the avg large stickpicker (See MIller Risk Advisors piece on the negative alpha of Fidelity Magellan) which pray tell is not very good. Given the likelihood of some less-than optimal non-financial objectives imbued into their activities, market participants should few their presence - like that of MoF & BoJ PKO & intervention respectively - as cannon fodder in the zero-sum sense, since no one can spend a trillion or two trillion wisely (the old-fashioned way) without leaving a trail of gobs and gobs of money anywhere and everywhere you go.
Their best bet is - like many large hedge funds - is to use their size and material non-public information about their own market activities and strategic objectives, to their advantage, though some - including regulators - would undoubtedly call it market manipulation. This they have done in the US Govt bond market for if you KNOW you’re the the largest marginal buyer of bonds and that you’ll continue to do so near term, you might as well be the largest seller of near-term bond puts, and all related manner of vol. If you want to increase your global resource co. holdings, just [temporarily] stop buying physical, run your inventories down - maybe even aggressively short some on exchanges - and watch the related stocks drop 30 or 40%. Skeptics might point to the fate of Sumitomo Corp or Codelco throwing their weight around, but neither were in the same league or marshalled the resources this thing that might as well be called “China Global Overseas Partners Fund L.P.
This is a real danger, for market participants, and nation-states alike, and is why they should be wary, and why they should be demanding SWFs adhere to certain universally acknowledged ground-rules, else they embark upon an investment equivalent of smash & grab.
Twofish: “Also the Fed isn’t set up to be an “attack dog” agency. The relationship between the banks and the Fed is too close for the Fed to serve in that function. The SEC and the state banking regulators are the “attack dogs” but subprime mortgage slipped through the cracks.”
Wrong. The Fed was explicitly required by law to monitor and regulate all mortgage activity. Specifically to prevent deceptive and predatory lending. Alan Greenspan and Twofish are apparently the only two people who think otherwise.
http://www.nytimes.com/2007/12/19/opinion/19wed1.html
QUOTE>> In 1994, Congress passed a law requiring the Fed to regulate all mortgage lending. The language is crystal clear: the Fed “by regulation or order, shall prohibit acts or practices in connection with A) mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of this section; and B) refinancing of mortgage loans that the board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”
Twofish: “One final point. No one designed the current system. It evolved. Complex systems that are designed systems generally don’t work that well.”
Ever flown in a Boeing 747 recently? Or maybe you think the jumbojet evolved without being designed.
http://www.guardian.co.uk/business/2007/dec/20/barclaysbusiness.subprimecrisis
“Barclays’ exposure to America’s sub-prime mortgage fiasco took a dramatic turn last night as the bank sued the Wall Street firm Bear Stearns for fraud and deception over the loss of hundreds of millions of dollars in an ill-fated hedge fund.”…..
This will stir things up a bit! Bear Stearns reporting losses tomorrow might soon be overshadowed by this little blip.
Will we see yet another SWF step in and get a chunk of BS stock at new year sale price?
Few Quick points,
I think its time we stopped calling MS a US Firm. Mack in all his meetings mentions “global franchise”
Its not just Ms Christianson, I am sure Mr. Roach also played a big hand in this. He is very close many chinese officials including the primer himself.
What surprises me though is, 10% for 5bio sounds a bit cheap to me.
2fish — I quite strongly got the impression that someone at the top of China’s leadership decided Blackstone was a good idea, called the right people and said find a way to do this. I am not sure the MS deal was done the same way, but the CIC is new — and the fact that it was until now seemingly on a course where it would be taking a much lower profile — suggests that something similar could have happened. I of course don’t know. But I do have a sense that the CIC’s internal governance means that the various bureaucracies that have a seat will rarely agree on a big decision — which effectively kicks it up. and conversely, the various deals that the CIC (And its predecessors, as Huijin technically did Blackstone) has done suggest that if someone high enough wants something to happen, it happens — all just a guess though.
Indian Banker — the global franchise til now had a largely American (I think) equity base, and certainly a equity base composed mostly of private investors. But yes, there is some ambiguity about what it means to be an American firm now, especially given their large London operations and the large equity participation of foreign governments. Maybe I should call Citi a Gulf firm, and MS a Chinese firm ….
Cassandra — interesting points, as always.
– do you have evidence that the Chinese have been big sellers of insurance against big moves in bond prices? and now that (by all appearances) the Chinese have scaled back their treasury purchases (Admittedly at a time with lots of private demand) have they changed.
– and could you spell out what exactly would be included in your “universally acknowledged ground-rules”? One of the things that bothers me with both ADIA/ Citi and CIC/ MS and UBS/ GIC is that the deals came (and seem likely to be approved) without any real commitment from the sponsoring governments to elevate their level of transparency.
For example, we don’t know the size of ADIA or the GIC - and that we only know the CIC’s size b/c of its funding structure … and that is just the basics. I assume you are thinking of much “thicker” ground rules.
50 Cent: The Fed was explicitly required by law to monitor and regulate all mortgage activity. Specifically to prevent deceptive and predatory lending. Alan Greenspan and Twofish are apparently the only two people who think otherwise.
Google for 15 USC 1639. Read that first.
OK, Fed passes regulation that bans all subprimes. Next day it ends up in front of a federal judge with a lawyer for the mortgage broker industry arguing for an injunction against that regulation, because subprime mortgages are not unfair or deceptive. “How,” asks the lawyer, ” are the mortgages unfair or deceptive?” Remember that the mortgages only are a problem after interest rates rise and before those rates rise they look like a good deal for the borrower.
50 Cent: Ever flown in a Boeing 747 recently? Or maybe you think the jumbojet evolved without being designed.
The 747 was built based on experience gained from the 737 which was based on experience gained from the 727 etc. etc. etc. You can draw a family tree of airplanes all the way back to the Wright Brothers in which each airplane caused lessons to be learned which impacts the next model.
And social systems are way more complex than airplanes.
Brad says: Maybe I should call Citi a Gulf firm, and MS a Chinese firm ….
Not quite yet. Give it some time. Probably in another couple of years. LOL.
The suspicion of the Chinese investment acumen is understandable, but the reasoning behind the investments really isn’t all that hard to understand. There is one thing China (through CIC) can supply and that is liquidity. Therefore they have no fear of their investees getting caught by a liquidity squeeze. And that is why they like financials. All the firms they invested in so far (BX, BCS and now MS) all have very significant reputational capitals. And they can protect the downside by providing liquidity.
As for whether the investments will pan out I have no doubt they will beat most stockpickers, if for no other reason than that they will be forced to hold these investments for the very long term.
bsetser: I quite strongly got the impression that someone at the top of China’s leadership decided Blackstone was a good idea, called the right people and said find a way to do this.
I just can’t imagine Hu Jintao or Wen Jiabao calling up CIC and saying “buy Blackstone.” More likely someone at the vice minister level ended up having lunch with someone associated with Blackstone, the idea of a deal came up, it went through the bureaucratic process and got rubber stamped.
One way of analyzing bureaucracies is to ask “where is the staff located?” Neither the President or the Prime Minister of China have large office staffs like the US Executive Office of the President so they are dependent on other institutions to make the phone calls. They are limited in the amount of orders they can give CIC since they don’t have the people to draft and issue the orders.
bsetser: But I do have a sense that the CIC’s internal governance means that the various bureaucracies that have a seat will rarely agree on a big decision — which effectively kicks it up.
Kicking it upstairs doesn’t help, since then you have the same groups of people arguing over the same things. If it isn’t going to resolved by the board of directors of CIC, then it’s not going to get resolved by the State Council, and Wen Jiabao, Hu Jintao, and the Politburo have more important things to worry about.
I think that all of the people on the CIC board will agree on one thing and that is that CIC should be profitable. How profitable, they may argue about, but that means that they won’t make any decisions that will result in a loss for CIC.
Indian Banker: Its not just Ms Christianson, I am sure Mr. Roach also played a big hand in this. He is very close many chinese officials including the primer himself.
On the other hand, I don’t know of any major US companies that don’t have people close to many Chinese officials. I don’t know of any major US companies that don’t have people close to many US officials.
But the deal still has to make business sense. Being friends with someone will allow you to pitch a sale to them, but they aren’t going to give you cash for the sake of friendship.
Indian Banker: What surprises me though is, 10% for 5bio sounds a bit cheap to me.
Something that would be interesting is to come back at the end of next year, and ask what would have happened had the major banks not gotten capital infusions. In particular, I’m just wondering if there will be enough bad news next year that one or more of the banks that are currently getting infused would have gone under without them.
“I just can’t imagine Hu Jintao or Wen Jiabao calling up CIC and saying “buy Blackstone.” More likely someone at the vice minister level ended up having lunch with someone associated with Blackstone, the idea of a deal came up, it went through the bureaucratic process and got rubber stamped.”
I would agree- I’ve worked in finance in China for a while- I assure you no Chinese had ever even heard of BlackStone until recently (only after this deal went down did BX get any name recognition here). Most Chinese still do not know what an investment bank does, and BlackStone isn’t even a “traditional” investment bank, so it received no attention compared to an MS or GS. In the past, Citi had the greatest reputation in China because it was, until a few years back, a commercial bank and all banks in China are commercial banks as we know them (except for possibly Citic).
Schwarzman needed a cut of the pie and it looks like he found it through some guanxi scheme with side “benefits” (”haochu”) that made its way higher up.
For those who complain about CIC taking a stake in Morgan Stanley, note that this year’s Morgan Stanley bonus pool is twice as large as China’s stake:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amn7duYECJQA
Assuming that they pay at least 50% of bonuses in cash, Morgan Stanley could have achieved the same increase in capital by simply paying $5bn (more) of their bonuses in stock. And despite their last quarter loss (of a similar size to the bonus pool), the bonus pool rose by 18%.
Is it any wonder that America’s whining cuts little ice with the rest of the world?
I asked here in May 2005:
http://www.rgemonitor.com/blog/setser/91413
“”"Stupid question: why don’t these Asian state buy strategic US equities (like Exxon for oil, …)? Buying USD equities with those billions will somewhat raise their spot levels, raising spots of USD equities will strenghten the US dollar since other people are likely follow the move by buying too. Written by guerby on 2005-05-02 17:47:44″”"
I guess we now know that international banks are considered strategic for SWF :).
“…In October, Bear Stearns and Citic Securities struck a landmark deal to invest $1bn in each other as part of a strategic alliance…” http://www.ft.com/cms/s/0/5da0ee4a-ae9b-11dc-97aa-0000779fd2ac.html
“…Barclays’ exposure to America’s sub-prime mortgage fiasco took a dramatic turn last night as the bank sued the Wall Street firm Bear Stearns for fraud and deception over the loss of hundreds of millions of dollars in an ill-fated hedge fund…” http://www.guardian.co.uk/business/2007/dec/20/barclaysbusiness.subprimecrisis
“…Morgan Stanley could boast yesterday that it has erected a Chinese wall: the CIC will have no management role or representative on the board, which may or may not be a condition imposed by the White House. The contrast is with Barclays, which now has a Chinese communist as a director after China Development Bank invested £1.5bn… It is also clear that the idea that CIC would diversify China’s foreign reserves away from the dollar was half-baked - the first two investments have been in US assets… How about China revaluing its artificially low currency? It is a legitimate question. Now that Beijing has wandered onto Wall Street, it can’t be ignored…” http://www.guardian.co.uk/business/2007/dec/20/1
“It’s a $5 billion injection into a market badly in need of cash.”
Not *that* badly in need. After all MS is paying 10 B Usd in bonuses this year. They could have cut bonuses in half (to an average of only 150 K usd per employee) and not have done any deal. But that would have, you know, have been forcing poverty onto their employees.
Look at it this way: MS is paying 20% of its equity capital every year to its employees in bonuses (I’m not counting salaries!). In five years MS employees could buy the firm, if they wanted to (but clearly they don’t want to). I think that pretty much makes clear that China is buying a shell company, where the real profits don’t go to the shareholders - they go to the employees. It reminds me of Sony buying Columbia. All that talent can just get up and walk, unless they’re richly compensated, so what’s the point of owning the company?
“That is true, but only if you ignore the currency risk.”
Yes, but they’re stuck with too many dollars, so they have the currency risk anyway. They have 200 B Usd which they presumably are *not* allowed to convert into Rmb. So getting 9%/year isn’t too bad.
“Maybe I should call Citi a Gulf firm, and MS a Chinese firm”
because their SWF’s hold a ‘non-controlling’ stakes of less than 10%?
“…The Organization for International Investment… also cheered the deal. “This is a partial stake, it does not implicate national security, it’s just like a large trade on the NYSE… It does not come with a board seat; it does not come with any aspect of control…” http://www.reuters.com/article/ousiv/idUSN1937428320071219?pageNumber=2&virtualBrandChannel=0
the very limited number of people who I have spoken to with experience on boards and the like tend to think that the biggest shareholders have a degree of influence, no matter what the formal structure. my point was that calling Morgan Stanley an American firm (or Barclays a British firm and DB a German firm) may hinge a bit on history and the location of the top management — operations are global (tho with concentration) and the most influential owners may be global as well.
2fish: “Wen Jiabao, Hu Jintao, and the Politburo have more important things to worry about”.
Hell if I know, but I actually suspect the Politburo has spent quite a lot of time worrying about this. The amounts involved are only small relative to China’s reserve growth — $5b is around 2% of China’s GDP. I forget how big the Mexican bailout was relative to US GDP, but it certainly was discussed at the top levels of government. All the more so because it was the first big bailout. MS is either the first big CIC investment (counting Blackstone as Huijin b/c the CIC wasn’t set up) or the first big CIC investment after blackstone. Either way, it wasn’t business as usual –
re: MS paying smaller bonuses to build up its capital — interesting point. the pay gap between the CIC and those running its two largest non-Chinese investments will also be very, very large.
HZ — you raise an interesting point about the CIC’s ability to supply liquidity. There is one catch though — they cannot supply more equity capital without exceeding the 10% threshold (CFIUS review), and they pretty quickly starting moving into “control”. The liquidity provision would have to come by discounting various illiquid assets on MS’s balance sheet (or just buying them outright). And that isn’t necessarily a great business — if you are china, rather than buying them from a firm who partially own to protect your equity investment, you might be better off buying them outright in the market.
on the other hand, maybe Morgan Stanley is now considered too Chinese (Even in the absence of a board seat) to fail?
a: Not *that* badly in need. After all MS is paying 10 B Usd in bonuses this year. They could have cut bonuses in half (to an average of only 150 K usd per employee) and not have done any deal. But that would have, you know, have been forcing poverty onto their employees.
The trouble with cutting bonuses is that then all of the employees jump ship to other firms that are paying better. I hear Goldman is doing well this year.
a: I think that pretty much makes clear that China is buying a shell company, where the real profits don’t go to the shareholders - they go to the employees.
I find this rather amusing because a company where the employees get most of the profits and the shareholders very get little is the holy grail of socialists. Workers owning the means of production and all that stuff.
bsetser: Hell if I know, but I actually suspect the Politburo has spent quite a lot of time worrying about this. The amounts involved are only small relative to China’s reserve growth — $5b is around 2% of China’s GDP.
The Politburo tends to issue very general directives and leaves specific implementation to lower levels. I very seriously doubt that the Politburo said “buy Morgan Stanley.” Rather if you look at Party “opinions” they are very general and focus on objectives. (i.e. The Party Central has established the follow objectives. Increase overseas investment. Increase financial innovation. blah. blah. blah.) These objectives aren’t particularly secret, but you have to go through pages and pages of dry, boring bureaucratic speeches, and most people in the Western press don’t have the patience to do this.
It’s people at the ministerial and vice-ministerial level that convert these general opinions into implementation measures.
Also, one large factor in how the Chinese government is designed has to do with the strong desire to prevent another Mao Zedong from coming to power, and this is why the President and the Prime Minister have no large personal staffs. The CPC General Secretary has the Party Secretariat but none of those people is really personally appointed by them.
Please forgive the naivety of this question, but what if other Chinese financial entities were to invest in MS? Would that automatically call for a CFIUS review, or could it go under the radar?
Pallj,
Given the sensitivity of the deal, it surely will be reviewed, heavily.
bsetser: the pay gap between the CIC and those running its two largest non-Chinese investments will also be very, very large.
This is turning out to be a huge problem with CIC and US state pension funds. The pay for civil service is low, and you can’t increase it without people screaming about fat cat government officials getting rich off tax payer expense.
One way of dealing with this is to outsource the work to private entities that can pay more than civil service. Another is to make the civil service positions low pay but high prestige (SEC). Finally, you can find people that are willing to do charity work.
The problem with outsourcing is that then you don’t know if the interests of the agent are the same as the principal. The MS investment might be a way of dealing with this problem.
At this point any more Chinese investment in MS would cause major screaming.
It’s interesting that there has been very little opposition to the Morgan Stanley purchase and that tells you something about the “political show.” In the case of CNOOC and Dubai Ports, there were interested commercial interests that would lose money if the deal went through, so you had this media campaign in which all these talking heads were brought out that which were saying that if the deal went through, it would be the end of the world. Groups like the US China Economic Security Review Commission are good for this sort of thing.
Here there is no one that would benefit financially from stopping the deal. MS’s competitors are also its counterparties so anything that improves MS’s capital position helps the other banks. So you don’t have this media campaign happening to block the deal.
One other thing is that this is a learning process, and the Chinese government has obviously learned a lot over the last 5 years, about how to deal with the US government and the media.
BSetser said: “I can see why the fund’s staff was surprised — in late November, Lou Jiwei seemed to indicate that the CIC wasn’t yet ready to make a large investment in a major financial institution. This kind of investment wouldn’t have been made without the approval of China’s State Council — not after Blackstone.”
Doesn’t mean this went through formal procedures at the State Council- all it would have taken was Paulson pulling someone like Wu Yi off to the side for 15 minutes and the deal could have gotten done.
The point is: I’m doubtful this (and other) investments are well thought out plots by China Inc to take over corporate America- makes for a good Times story (Bradsher, and formerly, Yardley, get repetitive though).
Bsetser wrote:
China’s banks have historically been used to implement China’s version of industrial policy — directing credit to favored sectors of the economy. That likely still happens, though credit is no longer being allocated to support as many loss-making industrial dinosaurs.
Not at the bank I used to work for. The closest thing the gov’t has done recently is try to restrict loans to polluting enterprises. If that’s a sinister plot by the Chinese gov’t to spread their influence, I’m all for it. What you’re talking about was probably valid 20 years ago.
There are two policy banks- Agricultural Development Bank, China Development Bank (”Guokai”)- the former may be mandated to direct loans to the agricultural sector.
Thanks for confirming that there would be a hissy fit re MS and further Chinese inv.
Something tells me this is going to become a major issue in the upcoming Pres election. Can’t put my finger on exactly how, but it seems to be too well suited to populist politics to be overlooked.
Brad,
They can also supply it in the form of debt: senior/subordinated/preferred shares etc — esp preferreds which counts as equity capital. Anyway just knowing the liquidity is there can raise confidence/trust/credibility, without the lending actually happening. I am not so enamored by investment banks as an investment choice because their incentive structure sucks. (BX may be an exception. Their incentive structure is different.) As someone pointed out it is something that China didn’t use to have so there may be a novelty factor, in addition to the match in terms of liquidity backup.
“The trouble with cutting bonuses is that then all of the employees jump ship to other firms that are paying better. I hear Goldman is doing well this year.”
So Merrill pays out bonuses because otherwise everyone will go to Goldman. And Morgan Stanley pays out bonuses because otherwise everyone will go to Goldman. And.. You know, maybe Goldman actually isn’t about to hire (I think their net head count will probably be stable or going down next year), and these sorry greedy people are only making excuses when really they are pigs at the trough.
Mack and Rubin are both Hillary supporters I think, which reduces the odds this becomes a big issue in the presidential election … Huck might raise it, but I doubt Romney would. The PE industry is rather pro-SWF, for obvious reasons. There is a real financial world/ rest of the country divide here, but the main candidates are likely to be supportive of the financial sector’s view and campaign on other issues. China hasn’t been as prominent an issue as I expected.
But the underlying reason why it could be a populist issue is that I would bet that the percentage of Americans who think allowing China’s government to own a major bank/ major firm is a good idea is well below the percentage of Americans who think free trade is a good idea …
who said anything about “allowing China’s government to own a major bank/ major firm”
who said anything about “allowing China’s government to own a major bank/ major firm”
Written by Guest on 2007-12-20 10:23:49
American media and some candidates’ campaigns will say that
“the biggest shareholders have a degree of influence”
that’s not ‘owning’, and has it been confirmed that ‘China’ is the ‘biggest’ shareholder?
and why is it that when ‘Wall Street’ and ‘Americans’ make money, that’s greed. when they loose it, that’s ’stupidity’
when EM nations make money that’s ’smart’ and when they loose it that’s ‘theft by greedy Americans’
Brad - “The PE industry is rather pro-SWF, for obvious reasons.” I think that’s true - as far as investments into the PE houses themselves. But, increasingly, major PE firms are worried about competing with SWFs to invest directly in deals , where there is a wide difference in cost of capital, as well as the ability/need to leverage. Different return expectations as well.
Also, you refer to 10% as threshold at which CFIUS review would be required - where do you get this? As far as I can find, the trigger for CFIUS review is “control” which is defined in regs as “the power to direct key matters affecting that firm — such as the power to sell off the firm’s assets, dissolve the firm, close its facilities, and terminate its contracts.” That presents wide opportunity to influence without triggering Government review based on “control”.
what about the influence of the bank’s biggest clients?
Guest: You know, maybe Goldman actually isn’t about to hire (I think their net head count will probably be stable or going down next year), and these sorry greedy people are only making excuses when really they are pigs at the trough.
People are still hiring. Managers are not known to be bleeding hearts when it comes to saving money. They might try to pad their own salaries, but if they could get away with paying the people under them less, they would. But they can’t. So they won’t.
bsetser: But the underlying reason why it could be a populist issue is that I would bet that the percentage of Americans who think allowing China’s government to own a major bank/ major firm is a good idea is well below the percentage of Americans who think free trade is a good idea …
But raw poll numbers matter a lot less than whether you get emotion out of it. People don’t care much about an economic issue unless you can convince them that someone is taking money from their pocket. Right now, I can’t think of a way of turning this into a hot button issue, and this is helped by the fact that there isn’t anyone I can think of who is financially motivated to turn this into a hot button issue.
I’m sure that Lou Dobbs is going to try hard to turn this into a “China is evil and wants to rule the world” issue. I’ll be interested in seeing what he comes up with.
2fish — the emotion is there. think of the emotions aroused by the thought that the UN might have a veto over US foreign policy. think of the symbolism.
that doesn’t deny the force of your point that CNOOC became an big issue b/c there was a US party that wanted to buy Unocal, and thus money on both sides of the equation. but i wouldn’t underestimate the symbolism — especially if a fund starts asking for seats on the board or pushes for policy changes (CIC says morgan is over-paying staff/ not making enough money/ should do layoffs/ cut salaries — tho on that issue, i suspect there would be some popular support for the CIC …). Or think of a CIC investment in a US manufacturing firm with actual operations in Iowa or Ohio or Michigan or Wisconsin or the like.
Doug R — good points. I think the PE guys have reason to worry — the funds don’t want to pay 2 and 20% these days, and they can borrow more cheaply than the PE guys. Plus my sense is that the PE world got a lot of sov cash recently and is having trouble gearing it up …
10% comes from memory — but I also presume there is a reason why the CIC stayed under the 10% threshhold in both Blackstone and Morgan Stanley. I think the threshhold for a regulatory review for a commercial bank is 5% (lower) which is one reason why ADIA stayed under 5% at Citi. But i am not an expert on this.
Chimera Investment Corporation is “a newly-formed specialty finance company that will invest in residential mortgage loans, residential mortgage-backed securities, real estate-related securities and various other asset classes and intends to elect and qualify to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Chimera Investment Corporation will be externally managed by Fixed Income Discount Advisory Company, a wholly-owned subsidiary of Annaly…” http://www.chimerareit.com/
Twofish: “I find this rather amusing because a company where the employees get most of the profits and the shareholders very get little is the holy grail of socialists. Workers owning the means of production and all that stuff.”
As far as I am concerned neither the shareholders nor the employees of Morgan Stanley and Goldman Sachs earned or deserved those bonuses. They are taking money out of the mouths of underpaid Chinese workers and putting into the pockets of greedy Wall St pigs.
Pardon the scepticism but sounds like a replay of nationalistic sentiments right around the time when japan inc went on a shopping spree in the USA. The big difference this time? Japanese banks are sitting out the rescue, which has left the mess to US domestic institutions ( so far rather ineffective) and European allies (Mr Claus at least till after the 2 January, ) and other investors who aren’t antsy about their $. Do you really expect SWFs to try to generate goodwill by providing liquidity for nothing? C’mon, would the same sentiments be aroused if any other investor/funds of a non-american origin come to the rescue? Would you seriously feel better if Branson came to the rescue?
Transparency with regards to US firms has usually come as more of an afterthought than a matter of habit, the secrecy of private equity firms themselves are seen as a matter of strategy, so why the fears about the lack of transparency on the part of SWFs? US investors and funds with specific political agendas or political affiliations aren’t exactly unknown, does it mean they too are some Bond movie villain in the curtains?
From someone living in an ex-colony, brad, you’re experiencing a bad case of anti- neo-colonialism , which is rather ironic to most of the rest of the world as they’ve just watched the US go on a bout of neo-colonialism for the last 50 years or so. Calm down.
Guest 2007-12-20 06:36:45 wrote:
” ‘Maybe I should call Citi a Gulf firm, and MS a Chinese firm’
because their SWF’s hold a ‘non-controlling’ stakes of less than 10%? ”
To answer your question Guest: Yes. Remember, these are the same people that created the “one drop rule.”
“We are *shocked* management withheld this information for as long as it did,” Ken Zerbe, an analyst with *Morgan Stanley* in New York, wrote in a report yesterday. “MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.”
Haha, right. That convert will be worth nothing.
From Breakingviews.com: Saudi Prince Alwaleed didn’t have a seat on the Citigroup board, but that didn’t stop then CEO Chuck Prince paying him many personal visits a year. Sovereign funds realize that they are buying similar power—it would be foolish to believe they won’t use it.
Judy –
I would feel much better about investment from Richard Branson — or from a transparent and democratically accountable sov. wealth fund, like Norway’s. I do not think the Japan analogy is at all accurate — Japan’s investment in the uS came from private investors, Japan was part of a security alliance with the US and Japan was/ is a democracy. Moreover, Japan’s investments came i think after the yen had been allowed to appreciate, so there was a mechanism in place for adjustment. China’s investments are coming in the absence of any adjustment — there is nothing that suggests China won’t be adding $500-600b to its foreign assets a year, with all the asset accumulation coming from the state.
that is new. that is not japan — the nature of the investment differs (state v private) as does the scale and likely duration of the flow.
but in a broader sense, you are right — I am not thrilled with the broader implications of the United States large external debts. Debtors though are powerless in the global game –
Brad
Granted, the Japanese “commercial” invasion of the 80s was led by its biggest corporations but if you were to look at the outcry (just the iconic time covers) over that scenario was just as nationalistic. Would it really be better if people on the Hurun report list of the wealthiest were to lead the charge to buy up stakes in troubled banks?
Saudi wealth fund to be world’s largest:
http://www.ft.com/cms/s/0/412752ae-afa4-11dc-b874-0000779fd2ac.html?nclick_check=1
50 Cent: They are taking money out of the mouths of underpaid Chinese workers and putting into the pockets of greedy Wall St pigs.
Chinese workers in the export industry are making more money than they ever thought possible. Chinese workers are just as greedy as people on Wall Street. Less capital to work with, but the motivation to get rich is just as strong.
One thing that is interesting is the a graph that I once saw about where the $40 that you pay for a shoe actually goes. The interesting thing is that the person that takes the largest fraction is actually the shoe salesman, and the fraction amount of money that actually goes to Wall Street and executives is smaller than the amount that goes to the shoe salesman or the Chinese worker.
The reason for this is that investors and ex