In James Clavell’s Noble House, there is a scene where a fictional Scottish trading house operating in colonial Hong Kong ends either a run on its bank or a run on its stock (or maybe both – I forget) by obtaining an emergency loan from China’s communist government. The loan didn’t come directly from China’s government – it came though the Hong Kong branch of Bank of China – but it clearly required Beijing’s approval.
Clavell's novel was set in a time when China’s government was still really communist. 1949 wasn’t a distant memory in the 1960s.
The world has changed since then. Chinese Communist have turned into capitalists. And fiction has turned into fact.
Last week, a capitalist icon turned to government – and not its home government -- for help in a time of stress. About two weeks ago Citi's top executives boarded a private plane to fly half-way around the world to cement the sale of a decent chunk of Citi's equity to the Abu Dhabi Investment Authority (ADIA).
Depending on your point of view, Citi’s recapitalization is structured so that ADIA either gets a generous coupon before it is obligated to buy Citi's stock, or the generous coupon is a way of disguising the discounted future sale price of Citi’s stock. See ALEA for the real details (hat tip Naked Capitalism).
ADIA’s investment is structured to stay below the 5% threshold that requires Fed approval (for a bank), let alone the 10% threshold that requires CFIUS (Committee on Foreign Investment in the United States) review. Still, it is hard to believe that Citi’s new CEO won’t pay a visit to ADIA along with Prince Alaweed soon after being selected. He (or she) might even get flown over in a private A380 rather than Citi’s corporate jet …
Citi got into trouble, at least in part, from off-balance sheet activities that were not exactly transparently disclosed. So perhaps it is fitting that it turned to one of the world’s least transparent investment funds – one owned by a rather untransparent government – for help.
It wasn’t all that long ago that Wall Street – Citi bankers included -- were scouring the emerging world for state-owned companies that could be sold to private investors in the US and Europe. Now the world’s investment bankers seem to be scouring the US and Europe for private assets that can be sold to government investment funds and state-owned companies in the emerging world.
Privatization is out. Selling private companies – or big chunks of a private company -- to another country’s government (partial renationalization?) is in.
Back when there was money to be made selling state-owned firms in the emerging world to private investors in the US and Europe, investment bankers argued that one major threat to global prosperity was political opposition to privatization. Any country that bowed to domestic political pressure and didn’t sell off its telecoms, banks and utilities risked being left behind. Now that there is money to be made selling private firms to state investors, investment bankers argue that one of the biggest threat to global prosperity – or at least “market liquidity” -- is political opposition in the US and Europe to selling stakes in US and European private companies to emerging market governments.
The financial world’s uber-capitalists have been brought to heel by the world’s new financial superpowers.
Or perhaps the state in the emerging world itself became uber-capitalist?
Abu Dhabi Inc (10% of the world's oil reserves split -- unequally -- among less than 500,000 people) has very attractive profit margins so long as oil can be sold at close to $90 a barrel. The leaders running some emerging market governments may now have more in common with top bankers on Wall Street and in the City than the democratically elected leaders now running the governments of the world's advanced economies ...