Sovereign Wealth Funds

Bond insurers are in trouble again, and banks will be forced to look for more capital. But the sovereign funds that bailed out investment banks in the winter may have lost their appetite for financials. A recent short-list of potential investors for Washington Mutual was absent of eight sovereign wealth funds the bank approached earlier. Merrill Lynch overcame investor reluctance in its last round of capital raising by agreeing to strict restrictions on subsequent share offerings.

Snapshot asks, as banks face further write-downs and seek to raise capital, will better deals lure sovereign wealth funds back into financials?

On Wednesday, Sumitomo Mitsui Banking Corporation pledged to invest $945 million in a plan by Barclay's to raise almost $9 billion in fresh capital. This follows a $1.2 billion investment Mizuho Financial Group made in Merrill Lynch in January.

In contrast to most developed world banks, which have been relegated to life-support by immense subprime losses, Japanese banks emerged almost unscathed by subprime debt. Along with various sovereign wealth funds, Japanese banks appear poised to become major investors in distressed Western financial institutions.

Snapshot asks, will Japanese investment be seen as less threatening than investment from the Gulf and China?

Sky News - Barclays Outlines £4.5bn Cash Injection
The Economist - Japanese banks: On the prowl again
AFP - Moody's upgrades Japan's debt rating
Mondo Visione - Japan's FSA Publishes English Translations of the Banking Act

Since November, sovereign wealth funds have injected $41 billion of a total of $105 billion into struggling financial institutions. Since the purchases, the weighted average of those investments is down 40%. Many sovereign wealth funds are somewhat protected by buying mandatory convertible bonds, which pay large dividends to their holders before paying out to those with common stock. Still, sovereign funds were hasty in their investments and have spent the last couple months licking their wounds.

Snapshot asks, when will sovereign wealth funds move back into financials?

Reuters - Gulf Arabs put brakes on buying spree, await bargains
Wall Street Journal - SWF Losses
Bloomberg - Bear Stearns's Ruin Will Shake Sovereign Funds
IMF (Box 1.2) - Global Financial Stability Report

Sovereign wealth funds from less-than-democratic states have been buying into private equity groups like Blackstone and distressed financial institutions like Citigroup, UBS, and Merril Lynch -- at a steady clip. While some commentators warn of the dangers of foreign control, writing in today's Wall Street Journal Europe, Heidi Crebo-Rediker and Doug Rediker say the price of admission to the American and European markets may be a measure of democratic reform.

If you are following the spread of the subprime contagion around the world, this event I hosted yesterday here at the New America Foundation is required viewing. Steffen Kampeter, CDU/CSU spokesman for the Budget Committee in the German Bundestag is a man in the subprime trenches. Kampeter's advice: focus on managing the unwinding of the crisis so it does not get any worse and only then go back and put in place the voluntary and if necessary, regulatory safeguards so this never happens again. A big thank you to the Konrad Adenauer Foundation for making it happen.

Discussing the emergence of sovereign wealth funds on Fox Business Channel was Douglas Rediker, co-director of New America's Global Strategic Finance Initiative: