I truly think this is only the beginning - if it is a good, bad, or indifferent thing I will let someone argue that. We have undertaken bad policies, and our compensation system in this country is based on short term risk taking (try to generate outsized performance in a short time frame 2-4 years, get rewarded handsomely and ride off into the sunset with massive compensation gains, even if fired, while someone else is left to clear up the mess). Since this is our system, this is the playbook we have to live by. And the 'free market' will take care of things in the long run. Weakened institutions will be taken over. Remember China took a stake in Bear Stearns already and in the financial system I believe by late 2008, most of those that are left standing will have major foreign equity stakes. I also see this in many other industries as major macro economic forces work against the US and our dollar continues to crater. Now there will be some major counter trend rallies in the dollar but without any political will to face long term debt issues (i.e. Medicare is 30x the issue Social Security is, but we can't even tackle Social Security not to mention what we owe for Medicare) our debtor nation status and lack of institutional controls with any teeth, will continue to lead us down this path. I could go on for a few days writing about the ills, but I'll spare you. Personally, with the way Citibank has been run (along with quite a few others) they deserve to be taken completely over by another country. They couldn't do worse....
But in the coming few years I expect to see a flood of Canadian, Australian, Middle Eastern, and Far East acquisitions. If nothing else this will put a floor on the value of US assets. Sovereign funds are going to be the next "big thing", and their buying power is going to make private equity and hedge funds look like minnows. Remember, I always say find where the dollars are and invest in those companies who benefit from those dollars. This has been the whole thesis for investing in infrastructure and agriculture stocks. So why should it be any different when we talk about the "really big picture". These countries have the money and are getting more by the day either through petrol or trade surplus. There are no short term fixes, and we have no political will to make any fixes so these are very long term trends. And we will continue down this path. What is sad is no one in power really talks about it or seems to even notice. Again I am not saying this in a protectionist fashion - the more intertwined economies are, the less liklihood of future wars or things of that nature so it's always good to be interdependent in my book. But if you believe in a strong country, these types of paths are very unfortunate.
But again, this is simply the beginning... top half of inning 1. The next 2-5 years will see waves of this investment.... we are in fact, giving away the store. We are essentially a subprime nation. The only difference is "we" (federal government) can print new dollars to keep the boat afloat, unlike individual people in the country. But the behavior is no different. (As an aside I'd expect the same to happen in Japan - the US is essentially a younger version of Japan at this point, with more natural resources but heading in a similar path). Of note, recent stakes by Middle Eastern investors in Sony (SNE) and AMD (AMD)
By the way the terms of the deal for Citibank are gosh awful, talk about desperation.
The deal is essentially a convertible bond that pays whopping 11% a year, which is nearly twice what current Citi bond holders earn.
You can tell how desperate the situation is because if this were 2 years ago, people would be raising a fuss, and worried about those "darn foreigners" buying our assets. Now, we are greeting this with hero worship - thank god, someone showed up to buy our crap.
- A $7.5 billion Abu Dhabi deal to buy Citigroup Inc (NYSE:C - News) shares may have created a model for acquisitions by Gulf and other emerging-market investors scouring the ruins of the U.S. mortgage crisis for bargains.
- The Abu Dhabi Investment Authority (ADIA) sought no role in managing Citi, allowing the world's wealthiest sovereign fund to invest as a saviour of the largest U.S. bank without the risk of being perceived in the United States as an Arab predator.
- Investors from Dubai to China could be considering similar deals with cash-strapped U.S. banks, hoping to ride a recovery in their stocks and avoid the political barriers that could have been thrust in their path in better times, analysts said.
- "There will be more such investments," said Giyas Gokkent, head of research at the National Bank of Abu Dhabi. "The other buyers will likely play the same white-knight role," he said of other Gulf Arab investments in Wall Street firms.
- Other Gulf investors, backed by $1.2 trillion in state reserves, say they could follow, depending on when they expect the worst of the crisis triggered by defaults on high-risk home loans to have passed.
- Funds and firms in the world's biggest oil-exporting region have been snapping up assets from Japan to Africa as their government-owners reap the windfall from a five-fold increase in crude prices since 2002. Gulf investors have spent more than $70 billion on foreign acquisitions this year, twice as much as the record set in 2005, to reduce reliance on oil revenue.
- The growing power of sovereign wealth funds is raising concerns in the West, with the Group of Seven industrial nations calling for greater scrutiny of their role this year. Still, the initial response to the Citi investment was different, even though it came from the largest and most secretive of these funds. U.S. Senator Charles Schumer, who opposed the DP World deal and raised questions about Borse Dubai's plans to swap stakes with Nasdaq Stock Market Inc (NasdaqGS:NDAQ - News), said ADIA was helping New York retain its status as the world's financial centre.
