from Follow the Money

Another sign the world is changing

August 14, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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There was a time not-so-long ago when troubled banks in emerging economies, sometimes formerly state-run banks, looked to private banks in the US and Europe for equity infusions.  Now, well, troubled banks and broker-dealers in the US and Europe seem to be looking to banks -- often state-owned banks and investment companies -- in the emerging world for help ...

I (obviously) have no idea if CITIC is going to invest in Bear.  The Bear-China Construction deal never happened.  But it would be consistent with recent trends.

There was a strong presumption several years ago that China's financial system would -- over time -- evolve so that it looked more like the US financial system and, I suspect, an presumption that private US and European financial firms would be major players in China's domestic markets.  Now in a world of "reverse globalization" it is at least plausible that China's state (along with financial institutions controlled by China's state) could end up with a significant ownership stake in US banks, US broker-dealers and US private equity firms, which would, in a way, make the US financial system look a bit more like China's financial system. 

Potential ironies abound.  The US government has long resisted any suggestion that hedge funds be required to disclose their positions.   But CITIC buys a stake in Bear,  China's state -- through CITIC -- could conceivably end up having access to a fair amount of information about the positions of some US hedge funds.  Bear is a big prime broker, and a large equity investor like CITIC would certainly have every right to know what risks Bear is taking. 

It wouldn't be entirely unprecedented for a government to invest in a financial firm to get access to financial information:  the Bank of Italy claimed it invested in LTCM in part to understand how hedge funds were influencing the Italian BTP market ... 

The intermingling of public and private money -- in a world where "socialism is for capitalists" and "capitalism is for socialists" -- does raise some interesting questions -- questions that I am still struggling with. 

I wonder what Michael Pettis -- who worked for Bear at one time -- thinks ...

NOTE: I edited this post somewhat after initially posting it to try to make my intended meaning clearer, and also to correct a couple of egregious spelling errors.

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