December 19, 2007

Now China wants a piece of the U.S. financial action

Just weeks after Singapore and the Abu Dhabi Investment Authority became major investors in cash-strapped financial institutions, China is getting in on the action.
Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.

China Investment Corp. (made the) investment in Morgan Stanley. China's government-controlled investment vehicle will hold no more than 9.9 percent of the investment bank once its investment converts to common shares in 2010.

Several points to note. One, the writedown is three times what MS had previously warned of just a month ago.

Two, if the writedown problems are continually that bad, as every financial institution weighing in on the matter of their books in the past 30 days have said, just how shaky is the system?

Three, as I’ve talked about before, just how much will foreigners try to invest in U.S. financial institutions? Will the Securities and Exchange Commission weigh in, or drop some hints? Or the Fed? Or Congress?

Paul Kennedy spoke about issues like this in his magisterial book, “The Rise and Fall of the Great Powers,” too.

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