Deals available in Wall Street!

The Wall Street firms are being effectively bailed out by the Sovereign Wealth Funds (SWFs) of China and other Asian financial superpowers. The list of Wall Street high and mighty reeling under the devastation wreaked by the sub-prime mortgage crisis is a veritable list of who is who of the investment banking world - UBS ($13.5 bn), Citigroup ($11 bn), Merrill Lynch ($8 bn), Morgan Stanley ($9.4 bn), HSBC ($3.4 bn), Bear Stearns ($5 bn), Deutsche Bank ($3.2 bn), Bank of America ($3 bn), Barclays ($2.6 bn) etc And this list is increasing every day and the losses mounting even faster. It is expected that in the coming few months, many hundred off billions of SWFs would have flown into the attractive investment opportunities presented by these Financial Institutions.

Consider the story till date. The Abu Dhabi Investment Authority has donned the white knight's role and invested $7.5 bn in the Citigroup, for a 5% stake, giving the embattled Citi breathing time. Government of Singapore's Temasek Holdings have poured in $9.7 bn to UBS after it reported write downs of over $13.5 bn over its sub-prime mortgage holdings. Oman Government Fund has added a further $1.7 bn to UBS. In October, Bear Stearns agreed to a $1bn investment from Citic Securities, which is controlled by China's government. The Chinese Development Bank, controlled by the Chinese state, owns 3% of Barclays. Morgan Stanley received a $5 bn infusion, or a 9.9% stake from the China Investment Corporation (CIC). The list of white knights on the lookout for similar investment options is large, given the over $2.5 trillion available with SWFs.

Call them white knights or financial raiders, but for their timely infusions the story could have been worse still. These legendary institutions could have fallen into terminal crisis, thereby severely denting confidence and dragging down the entire financial market. To that extent, it may not be incorrect to claim that Asian and Oil producing nations' taxpayers have been subsidising the bail out of US and European Financial Institutions (FIs). But these investments are also excellent opportunities for the SWFs to take stakes in some of the biggest FIs, at a cheap cost and relatively favorable terms. For example, the CIC stake in Morgan Stanley is structured so that it is guaranteed a 9% annual return till it converts its investment into equity in 2010.

For now, there is little opposition in the US to these infusions. The US law makers and Wall Street opinion makers realize the dire need for such inflows at this time and feel that it may be detrimental to their interests to scare away these good samaritans. Many of these investments are also adequately regulated in so far as it limits the investors to be passive investors, with no seat on the Board. This is in stark contrast to the outcry generated in the aftermath of the $18 bn bid for Unocal by Chinese state-owned oil firm CNOOC in 2005 and the Dubai Ports World's takeover of some strategiucally important US ports in 2006.

The situation is ironical in that it is an exact inversion of the East Asian economic crisis of 1997, when the large Wall Street Firms had a grand ball, knocking away stakes in many local FIS at very cheap rates! The wheel has now come the full circle!

Update 1:
On December 24th, Singapore's Temasek Holdings announced the investment of $6.2 bn in Merrill Lynch.