KEY POINTS:
Foreign investors are swooping on Wall St, buying up chunks of America's biggest banks to take advantage of the damage wreaked by the sub-prime crisis and the credit crunch.
While the big banks are suffering from the effects of the overinvestment in risky mortgage-backed debt, outsiders are jumping
at the chance to own a stake in the financial heart of America.
A US$7.5 billion ($9.77 billion) chunk of Citigroup has been sold to an investment vehicle controlled by the United Arab Emirates, while UBS, the Swiss banking group, has accepted a cash injection from the Government of Singapore and an unnamed Middle Eastern fund worth more than US$11.5 billion, through the sale of convertible bonds. UBS plans to sell a further US$2 billion of shares, with the same Asian and Middle Eastern investors likely buyers.
So far UBS and Citigroup have been hardest hit by the sub-prime and credit crises, and their balance sheets have become severely undercapitalised. In an effort to put the mess behind them, they have declared billions upon billions of dollars of asset write-downs in the hope that no more shocks will crop up in the coming months.
To move on from the crises effectively, however, the banks need financial support from institutions that have the means to dig in for the long haul - and that means giving away ownership.
Most big investors in the West - such as mutual funds and local governments - are also feeling the pain of the credit crunch and so are unable to commit themselves to the scale of rescue package needed.
Therefore, sovereign funds in the oil-rich Middle East - and their equivalents in Asia, where the sub-prime crisis has failed to penetrate - are the only option.
Wall St analysts now believe that other big banks and brokerages are also looking to outsiders to help to shore up their balance sheets.
"If the crisis continues or gets worse, banks will probably seek more investment in this form," said Frank Braden, banking analyst at Standard & Poor's in New York.
While the ownership of big stakes in financial institutions by foreign or sovereign investors alters nothing in the way that banks are run, it has the potential to create diplomatic tension.
"There is a danger that too much foreign interest in American banks and Wall St in general could generate negative sentiment in Washington," Braden said.
Meanwhile, Washington Mutual, one of the biggest high street banking groups, is seeking a US$2.5 billion cash injection to stay afloat, and bond insurer MBIA had to go cap in hand to private equity firm Warburg Pincus for US$1 billion.
- Observer
