From Greenspan put to SWF bid
Large western financial institutions which suffered huge losses in the subprime markets have been able to raise additional capital by attracting investors from Singapore and Middle East. FT article describes transaction between UBS, Government of Singapore Investment Corporation (which is a state owned Sovereign Wealth Fund) and unnamed Arab investor. Few weeks earlier a similar transaction was executed to recapitalize Citigroup (Abu Dabi 7.5bn dollars), who also suffered large losses in the subprime market.
I have been arguing for some time on this blog that in the era of lack of confidence and depressed asset prices it should not be the job of developed countries central banks to restore confidence, as it may lead to large moral hazard and excessive risk taking. Emerging markets central banks and sovereign wealth funds are in a much better position to play that role, as they may step in, buy distressed assets, support the market and make lots of money at the same time. It does appear that the Greenspan put era is gradually replaced with SWFs bid times.
This is also likely to be much more effective. Economists are worried that banks’ balance sheet trimming may ignite recession. It is better to raise new capital than to prevent financial markets -induced recession by providing put option. Every time Greenspan put option is exercised, the next “transaction” notional value will likely be an order of magnitude bigger.
In the 20th century crisis taxpayers paid the cost of the crisis in a form of inflation tax or direct fiscal burden. In the 21st century the “cost” of a crisis seems to be the transfer of wealth from short-term oriented, liquidity constrained institutions in the North and West to long-term focused and liquidity abundant financiers from the South and East. In old times British Empire merchants traded tea for opium with China and silver was the currency. In 21st century we trade “greed” for liquidity, and the currency is power and control. It is the intangible century indeed.
FT article summary is below:
UBS on Monday became the second big investment bank in a fortnight to be bailed out by a sovereign wealth fund when it announced a SFr19.4bn ($17.2bn) recapitalisation plan after revealing another $10bn of losses on subprime mortgage securities.
UBS was forced to turn to the Government of Singapore Investment Corporation (GIC) and an unnamed investor from the Middle East for funds to shore up its balance sheet after the fresh losses emerged.