Sep 19 2008
china isn’t getting burned twice
Really interesting article from Time today entitled “ Why China Won’t Come to the Rescue” that discusses why China isn’t about to invest to save battered American financial institutions. I think the reason can be summed in 2 ways:
- Been There, Done That…
- I’m Not Falling For That One Again…
Basically, China is not about to play the fool twice and throw its money away. Here’s the article:
If “once burned, twice shy” isn’t an old Chinese proverb, it probably should be. As Gao Xiqing, the chief investment officer of China’s $200 billion sovereign wealth fund, meets in New York City this week with Morgan Stanley CEO John Mack to discuss increasing the Chinese government’s stake in the venerable — and flailing — investment bank, he bears an obvious burden. Last December, the CIC (the China Investment Corp.) invested $5 billion for a 9.9% stake in Morgan Stanley. On paper, that investment is now down more than 25%. Worse, Beijing paid $3 billion for a piece of the Blackstone Group just ahead of the private-equity firm’s initial public offering last June — an investment that occurred about a nanosecond before the so-called subprime crisis began annihilating value on Wall Street and beyond. Fairly or not, the Blackstone stake has since become the symbol in China of a naive bunch of foreigners getting hooped by Wall Street sharpies. It’s been the subject of withering public scorn in China and has drawn pointed private criticism from the highest levels of the Communist Party, banking sources in Beijing and Hong Kong have said. The message: Never again.
Well, not entirely. Read on:
The answer, if the recent behavior of other sovereign wealth funds and foreign private equity houses is any indication, may be to deliver, in person, a simple message: No. Not again. Not unless you structure a deal in such a way that we simply cannot lose. Otherwise, goodbye. That, in effect, is what Sameer Al Ansari, the CEO of Dubai International Capital, told Wall Street earlier this summer. “There are a lot of other compelling places to look for investments these days,” he said.
To the extent that sovereign wealth funds are talking to desperate-for-capital bankers in the U.S. — and, as Gao’s trip shows, they are talking — the terms of the discussions, one senior Hong Kong–based banker said today, are likely to be very harsh for any potential recipient of capital: “You’re basically looking at structuring a deal at this point in which there is no downside — none. Even if a company goes under, like Lehman, you’re first in line to get paid a return on your assets. Take it or leave it.”
Now this should prove interesting from a lawyer’s perspective. Why? Because as an American lawyer, I can think of almost no good reason why you should structure a deal so one-sided if you still have any duty of loyalty to your client. Obviously avoiding catastrophy is probably a good reason. But I can also imagine that in good times, that attorney’s tail is on the line for borderline malpractice… or at least, if not malpractice, I wouldn’t be returning as a client. That’s a very tough line to tread. And not many lawyers are quick to write up such agreements for their clients where they lose big time.
Of course, clients are stubborn and will force their lawyers to do crazy things at times. I think money, the bottom line, and the power of economics may have something to do with this. But as an attorney, it’s not fun being in that position.
From a business perspective, it’s almost ironic that Wall Street–the proverbial powerhouse of international financial markets–may be getting taken to school by Sovereign Wealth Funds. But then again, SWF’s have something that Wall Street desperately seems to need–cold hard cash. But given the current environment, you gotta do what you gotta do.
And there’s a bit more:
Now, moreover, even if valuations in the U.S. financial sector get more appealing should the market rout intensify, there’s another factor in play: governments in East Asia and the Gulf want their funds to help domestic companies, not foreigners. On Thursday, for example, Beijing’s CIC announced it would make investments in three of China’s biggest commercial banks — Industrial and Commercial Bank of China, Bank of China and China Construction Bank — that themselves are getting hurt by an economic slowdown and a real estate slump at home. “This is a significant policy initiative aimed at supporting China’s leading financial institutions at a time of global turmoil,” says Jing Ulrich, chairman of China securities at JPMorgan in Hong Kong. It’s another way of saying to CIC’s Gao Xiqing, If you come home from New York having increased our stake in Morgan Stanley, it had better be the sweetest deal anyone in Beijing has ever seen.
I just couldn’t resist throwing this part in. Nationalism, yes. But a necessary nationalism? Yes. China isn’t stupid. Why throw away your money in America when you can throw it away in China? And helping your own country’s economy? It’s a no brainer. (not like my post on Coke and Huiyuan, that is a different shade of nationalism)
What’s this have to do with the American side? Its what the end of the article is: American financial institutions must make these deals really sweet for the SWFs like CIC. Or they aren’t getting any of the money. Sounds like a terrible dilemma to be in really. But that’s business.
