from Follow the Money

Shanghai, Mumbai, Dubai or goodbye. The year of reverse bailouts

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Shanghai, Mumbai, Dubai doesn’t really quite work. The CIC is in Beijing, not Shanghai. Singapore has committed more funds to troubled banks than Mumbai. Abu Dhabi, Saudi Arabia and Kuwait have a lot more cash than glitzy Dubai.

But Andrew Ross Sorkin’s alliterative phrase captures a deeper truth.

A group of banks that previously had advised most US companies that they had too much equity and too little debt have found themselves short on equity.

And a group of banks that in the non-so-distant past argued that state ownership was a barrier to development are now themselves partially state-owned.

The most money the IMF ever lent to the emerging world in a quarter?

$13.7b - in the third quarter of 2001 (Turkey and Argentina ... )

That is just a bit more than the $13.4b lent out in the fourth quarter of 1997 (Asia). The IMF also lent out $10.9b in the second quarter of 2002 (Brazil) and $9.6b in q3 1998 (Russia and Brazil). And yes, two of the four biggest quarters for IMF lending came under the Bush administration’s watch. Foreign policy concerns trumped market fundamentalism.

Capital infusions from emerging market governments to US and European banks smarting from losses on US mortgages in q4? $28.4b, by my count.

The list includes:

$7.5b Citi/ Abu Dhabi investment authority (ADIA)

$5b Morgan Stanley/ China investment corporation (CIC)

$4.4b Merrill/ Singapore’s Temasek (with an option for another $0.6b)

$11.5b UBS/ Singapore’s GIC and some combination of Saudi royals.

I left out Barclays/ China Development Bank (CDB) since Barclays was looking to finance a big acquisition, not to cover big losses. I left out CITIC/ Bear since that deal was structured as a swap, not as a capital infusion.

If the banks haven’t yet put the worst behind them and are still seeking more capital -- as seems likely, given today’s Wall Street Journal story indicating that Citi and Merrill are looking for more capital from sovereign funds -- total emergency capital infusions into US and European banks over the next year from the emerging world should rather easily top the $29.6b or so the IMF lent to the emerging world in the four quarters during the Asian crisis when it lent out the most -- q4 1997 to q3 1998.

The funds committed by emerging market sovereign funds in the fourth quarter already top the $22b the IMF lend out during the four quarters from mid-2001 to mid-2002, but that $20b was followed by another $17b or so over the next year, producing a two year total of around $40b. If the numbers the Journal mentions this morning are accurate, total capital infusions from emerging market sovereign wealth funds then will truly be comparable in scale to the funds the IMF provided to emerging economies.

Reverse bailouts are, I guess, one consequence of reverse globalization.

Capital now flows from the emerging world to the advanced world.

Back in 1997, investors worried about hidden losses in the emerging world - and central banks that had fewer reserves than they claimed. Now they worry about hidden losses in the US and Europe.

And governments in the emerging world are now bailing out private banks in the advanced world, particularly those banks who originate-and-distribute business model ran into severe trouble.   Originating and distributing to your off-balance sheet SIV didn’t really disperse the risk.  

Reverse globalization seems to have spawned reverse privatization.

Talk about a change.

The big story of the past five years, in my view, has been the reassertion of the state in global markets.

Large central banks and investment funds now drive the flow in much of the foreign exchange market.  

Hedge funds used to strike terror into the hearts of emerging market governments. Now most hedge funds are looking to manage the money of emerging market governments. Sovereign funds have displaced pension funds as the key source of funds for the "alternative fund management" industry.

State ownership of banks used to be considered inefficient. Now banks that have not already sold a stake to China’s government worry that they will be at a competitive disadvantage relative to those that have.

And interestingly enough states with the most financial firepower these days are also not democracies. That too is something of a change -- one that also may have important long-term consequences.

Bill Clinton argued back in 2004 that it was hard for the United States to enforce its trade law against its bankers.

It is presumably equally difficult to press for political reform -- notwithstanding the FT’s recent leader arguing against finding "expedient allies" in autocratic governments -- in governments that are bailing out your banks.

Especially since it isn’t at all clear that a democratic majority in the Gulf or China would be willing to take the risk associated with investing in a major US financial intermediary. It is striking to me that no democracy has yet committed funds to invest in a big bank or broker-dealer.

One last note: Assurances made back in 2005 and 2006 that the well-capitalized US financial system provided a buffer against the range of risks associated with quite visible macroeconomic imbalances now ring rather hollow. Forcing the financial intermediaries at the core of the system to hold more capital right now would be counter-productive, as they apparently lack enough capital to support their current balance sheet. But it does seem -- in retrospect -- that many failed to hold enough capital to support all the on and off-balance sheet risks that they were taking. I hope their regulators have taken note.

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