Commentary

Struggling Banks Get Foreign Investment

It seems as though xenophobia has an inverse relationship to the ebb and flow of the stock market. As stocks prices sink under the gathering economic gloom brought on by the collapsing housing bubble, paranoia  about sovereign wealth funds started to rise. These funds  are made up of the accumulated savings of  developing nations, such as the oil-rich Persian Gulf states  and emerging Asian economies. Sovereign wealth funds are making big investments in America’s large, but struggling investment and commercial banks. These funds are usually operated by foreign governments, and that is causing alarm bells to sound in America’s paranoid heartland  and anxious capital city.

Just last month, the governments of Singapore, South Korea  and Kuwait, through their sovereign wealth funds, poured $21  billion into Citibank and Merrill Lynch. The inept management squads of these two struggling financial giants welcomed the money with open arms and grasping hands. It seems as though their greedy behavior during the happy days of the housing bubble has left them exposed to tremendous losses on their subprime mortgage portfolios, leaving gaping holes on their balance sheets.

According to the Economist, sovereign wealth funds have invested  $69 billion in western investment banking giants since the start of the subprime mortgage meltdown last year. It seems that the financial  crisis of 1998 is repeating itself with a very noticeable shift: the  developing world is coming to the rescue of the largest post- industrial economies. This is how free markets and the capitalist  system are supposed to work. Excess savings are channeled to where the return appears to be the greatest – there really is no  need for further discussion.

But, this is an election year in Americatown (a term borrowed  from those talented writers of the Simpsons). As the economy  staggers and job growth slows from the effects of a deflating housing bubble and a credit crunch, someone must be subjected  to the reckless index finger of blame. To assign condemnation  where it really belongs would make everyone look and feel bad  (which would have one benefit; it would boost anti-depressant  sales and provide a shot in the arm to the pharmaceutical industry).

Many voters bought houses they couldn’t afford; bankers lent  money irresponsibly, and Washington politicians – on both sides  of the aisle – looked the other way. “Sovereign wealth funds are buying our nation’s prized assets on the cheap for sinister purposes,” the politicians  will howl as the election draws near. The housing bubble was built on a pile of crappy mortgages. The bottom line is: we’ve scooped up foreign assets on the cheap before and we just don’t like it when we’re the ones in the weakened position.

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© 2008 Splendid Marbles.