Monday, January 14, 2008

China and Kuwait to the Rescue of Citigroup

The sub-prime mortgage mess has blown huge holes in the balance sheets of America’s leading financial institutions. Analysts project that Citigroup will write off as much as $20 billion and Merrill Lynch between $10-20 billion in losses in their next quarterly reports. To restore their respective balance sheets, Citi plans to raise up to $14 billion and Merrill Lynch billions more.

Of the money for Citi, China’s government-owned and directed China Development Bank is projected to provide $9 billion, with the Kuwait Investment Agency and other public investors the balance. Kuwait is also prepared to put $4 billion into Merrill.

In 2007 China’s trade surplus with the rest of the world, largely concentrated in Europe and the United States, amounted to $262.2 billion, a monthly average of $21.9 billion. To put those numbers in perspective, the cost of U.S. military and civilian operations in Iraq and Afghanistan ran in the neighborhood of $200 billion over the last twelve months, a monthly average of $16.7 billion. Nine billion dollars from the China Development Bank amounts to about sixteen days of military operations in Iraq and Afghanistan, with Kuwait and other investor’s another 7 days.

Global free markets in goods, services, and capital flows are healthy for the world economy. But investments from China and Kuwait represent the acquisition of Citigroup equity by sovereign wealth funds or foreign government entities. This amounts to partial foreign nationalization of the U.S. financial infrastructure. If partial nationalization is required to restore the health of U.S. financial institutions, perhaps it would be better if the Social Security Trust Fund provided the resources. Much as one may dislike having Social Security take a stake in U.S. corporate equities, it can’t be worse than having the stake in Chinese and Arab hands.

The U.S. is fighting terrorism and trying to establish viable democracies in Iraq and Afghanistan. But these noble efforts may come at the price of increasing foreign ownership of the most important U.S. financial institutions.

Worse still, the United Nations Office on Drugs and Crime reported that opium production in Afghanistan reached an all-time high of about 600 million tons in 2006, nearly double that of 2001. (The Taliban regime was overthrown in November 2001.)

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