Sovereign funds save Wall Street amid fears of sinking situation

PUBLISHED : Tuesday, 12 February, 2008, 12:00am
UPDATED : Tuesday, 12 February, 2008, 12:00am

While mounting subprime losses and credit concerns have threatened to sink the global market, some say the situation could have been even worse if Wall Street had not been thrown a lifebelt by an unlikely rescuer.

After the banking sector in the developed world was battered by massive losses, leading western banks have turned to emerging markets to obtain the capital they need to shore up their balance sheets, signalling a significant shift in global liquidity.

Emerging market state-controlled investment vehicles known as sovereign wealth funds have pumped almost a combined US$69 billion in the past 10 months into financial institutions strapped for cash, according to The Economist last month.

'Their ability to step into the gap as they did probably did prevent the financial crisis from getting more serious,' said David Cohen, an economist at Action Economics. 'We can thank the sovereign wealth funds for keeping the wheels rolling.'

With money coming in from oil sales and trade surpluses, emerging markets from across the Middle East and the Pacific Rim have put portions of their savings to work in sovereign wealth funds. These funds, together with a few others from the rest of the world, amount to almost US$2.9 trillion and may surge in size to US$12 trillion in 2015, according to a Morgan Stanley estimate.

Just last month, sovereign wealth funds put a combined US$21.1 billion on the table to bail out Citigroup, the largest bank in the US, and Merrill Lynch, the largest brokerage in the world, after they both reported massive fourth-quarter losses.

The two Wall Street giants have grown accustomed to such partnerships as Merrill in December last year said it had struck a deal for as much as US$6.2 billion with Singapore's Temasek Holdings and an asset manager and Citigroup obtained about US$7.5 billion in November from Abu Dhabi.

In December, the mainland's sovereign wealth fund, China Investment Corp, paid US$5 billion for as much as a 9.9 per cent stake in Morgan Stanley after the US bank recorded a larger-than-expected fiscal fourth-quarter loss.

In June last year, China Investment Corp paid US$3 billion for a stake in US private equity giant Blackstone Group.

However, former US secretary of the treasury Lawrence Summers said in Davos last month that sovereign wealth funds should become more transparent and called attention to the potential political pressure that they may be able to exert on their hosts.

But others put such concerns down to nationalist politics, saying sovereign wealth funds were like any other investor and just wanted to find a better return for their savings.

'Most of these sovereign wealth funds are just like pension funds,' said Bank Sarasin's chief investment officer, Burkhard Varnholt.

'It has been a great blessing to the world economy that they have been around in the last few months.'