Foreign investments in US banks draw scrutiny

Five deals in the last two months, worth more than $30 billion, prompt fears of influence by overseas nations

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Associated Press / January 16, 2008

WASHINGTON - Overseas state-run investment funds have sought to avoid regulatory scrutiny in Washington by taking small stakes in US companies.

That strategy is likely to be tested, however, as the sheer number of investments - five deals worth over $30 billion in just the past two months - begins to set off alarm bells in Congress.

A backlash against foreign investment could be exacerbated by presidential and congressional elections, with candidates seeking to exploit fears of foreign influence over American businesses, especially with the economy potentially headed into a recession, analysts said.

"The environment [in Washington] is going to become more anxiety-ridden," Charles Johnston, an attorney at the Baker Donelson law firm, said. Johnston oversees the firm's international transactions group.

Nevertheless, there are plenty of defenders of foreign investment in the United States, with some analysts arguing that the purchases amount to a "vote of confidence" in the long-term health of the US economy, even as individual banks and other companies struggle.

The flow of funds from overseas could bolster the US dollar, and sovereign wealth funds are the type of long-term investors that can stabilize the financial markets, said Doug Rediker, codirector of the international finance group at the New America Foundation.

Todd Malan, president of the Organization for International Investment, said the purchase of beaten-down companies in the US banking sector by overseas investment funds simply reflects a "classic buy low, sell-high strategy."

Malan's group represents US subsidiaries of overseas companies, such as Nestle, Sony Corp., and Nokia Corp.

The latest investments by state-run investment funds, known as sovereign wealth funds, were made public yesterday.

Citigroup Inc., the nation's largest bank, said it will receive nearly $7 billion in fresh capital from a sovereign wealth fund in Singapore, as well as investments from the Kuwait Investment Authority and Prince Alwaleed bin Talal of Saudi Arabia. Merrill Lynch & Co. said two state-run funds - the Kuwait Investment Authority and the Korean Investment Corp. - and a Japanese investment bank would invest $6.6 billion.

Sovereign wealth funds, which are found mostly in the Middle East and Asia but also in European countries such as Russia and Norway, control an estimated $2.5 trillion in assets. Some experts predict their holdings could reach $12 trillion by 2015.

This fall, analysts noted the sovereign funds were seeking to avoid regulatory scrutiny by structuring their deals in certain ways: The stakes were small, they did not include board seats or other levers of control, and they generally avoided sensitive industry sectors such as energy or government contracting.

Generally, acquisitions of less than 10 percent of a company that don't provide a board seat or other levers of control are considered passive investments and don't require review by government security agencies.

When an Abu Dhabi state-run fund last November purchased a 4.9 percent stake in Citigroup for $7.5 billion, Senator Charles Schumer, Democrat of New York, a critic of many previous foreign buyouts, praised the deal.

But Schumer sounded a more cautionary note yesterday.

"As investments by sovereign wealth funds in American companies increase and the specter of control and undue influence by government entities looms, we have to be careful," he said in an e-mail.

The Senate Banking Committee is likely to hold hearings on the funds this year, aides say.

European governments have expressed open hostility to the funds. French President Nicolas Sarkozy said this month that his government would defend "the primordial economic interests of the nation" against government-run funds, which he said "don't respect economic logic."

German Chancellor Angela Merkel pledged in August to closely monitor foreign investments in German companies.

Meanwhile, members of Congress are seeking more information on the funds. The Government Accountability Office, the investigative arm of Congress, began a probe last week into their size and scope. Senator Richard Shelby, Republican of Alabama, requested the investigation last fall.

But the GAO will also report on whether the funds' impact on the US and global economies is being "effectively monitored," Yvonne Jones, a GAO official, said, and how US law on foreign investment applies to the funds.

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