Is Geithner Planning on a Public-Private Partnership with the Sovereign Wealth Funds?

The big gimmick to Tim Geithner’s new plan to avoid nationalizing the banks save the big banks is a public-private partnership.

Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.

  • Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
  • Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets

There are a couple of sources of private money available on the scale that is necessary to help out: billionaires like Warren Buffett (net worth, $62 billion), pension funds (total assets as of last September, before the crash, $28.1 trillion), mutual funds (total assets before the crash, $26.2 trillion). While Buffett has shown some willingness to bail out these banks for the right price, I can’t see pension and mutual funds wanting to take on the risk.

And then there’s a source of funding that the big banks have already turned to in an effort to stave off this crash–a source which has a lot invested in forestalling nationalization: sovereign wealth funds (total assets before the crash, $2.7 to $3.2 trillion, and expected to grow to between $5 and $13 trillion).  SWFs, of course, are the investment arms of oil producers like Saudi Arabia, Kuwait, and the UAE, and exporters like China, Singapore, and South Korea.

I’m particularly interested in whether or not Geither is expecting sovereign wealth funds to be involved in this public-private partnership because of the role they had in "saving" a few big banks between November 2007 to January 2008. The GAO describes these investments to include:

November 27, 2007: Abu Dhabi Investment Authority invests $7.5 billion in Citigroup for a 4.9% stake in the company.

December 19, 2007: China’s SWF invests $5 billion in Morgan Stanley for a 9.9% stake in the company.

December 24, 2007: A Singapore SWF and Davis Selected Advisors invest $6.2 billion in Merrill Lynch for a 13% stake in the company.

January 14, 2008: Kuwaiti and South Korean SWFs, and Mizuho Bank of Japan invest $6.6 billion in Merrill Lynch for an undisclosed stake in the company.

January 17, 2008: Singaporan and Kuwaiti SWFs (and Saudi Arabia’s Prince Alwaleed bin Talal) invest $12.5 billion into Citigroup for an undisclosed stake in the company (as of November 2008, bin Talal personally owned a 5% stake in Citi).

So basically, the investment arms of a bunch of foreign countries dumped tons of money just a year ago into banks that were already hemorrhaging money. I’m guessing those investment arms have been lobbying pretty hard for Geithner not to nationalize these companies, which would have meant they would lose billions. 

SWFs are reported to have invested further, even larger funds into failing banks last year (including an additional $50 billion into Citi) but there appears to be much less reporting on these investments–since the GAO report on SWFs came out just before the crash, attention seems to have turned to TARP at the expense of the SWFs. And all this investment in US banks comes on top of huge stakes SWFs have taken in Barclays and UBS, as well as China’s SWF nearly investing in a huge stake in Bear Stearns.

There are two big problems (at least) with SWFs owning such big stakes in these banks. It is already hard to separate foreign policy issues from economic issues: but if nations can devastate our economy with their actions on our biggest bank, it risks severely constraining our foreign policy. Further, some of these loans give the SWFs further equity starting in 2010, at which point the SWFs may have even more flexibility to mess with these companies. And to what degree is Geithner’s refusal to nationalize the banks driven by the demand from these foreign countries that he not make their considerable stakes in the banks worthless? To what degree are we focusing on fixing Wall Street–to the neglect of Main Street–because these powerful investors don’t want to lose their billions?

But also, what would it mean for the US to engage in a "public-private partnership" with what are essentially other countries? There is some review of SWF acquisitions under CFIUS.

CFIUS and its structure, role, process, and responsibilities were formally established in statute in July 2007 with the enactment of the Foreign Investment and National Security Act (FINSA). FINSA amends section 721 of the Defense Production Act to expand the illustrative list of factors to be considered in deciding which investments could affect national security and brings greater accountability to the CFIUS review process.11 Under FINSA, foreign government-controlled transactions, including investments by SWFs, reviewed by CFIUS must be subjected to an additional 45-day investigation beyond the initial 30-day review, unless a determination is made by an official at the deputy secretary level that the investment will not impair national security.12 CFIUS reviews transactions solely to determine their effect on national security, including factors such as the level of domestic production needed for projected national defense requirements and the capability and capacity of domestic industries to meet national defense requirements. If a transaction proceeds to a 45-day investigation after the initial 30-day review and national security concerns remain after the investigation, the President may suspend or prohibit a transaction. According to Treasury, for the vast majority of transactions, any national security concerns are resolved without needing to proceed to the President for a final decision. The law provides that only those transactions for which the President makes the final decision may be disclosed publicly. [my emphasis]

But so long as a Deputy Secretary–say, working for Geithner, whose plan this is–decides these investments won’t harm national security, it appears to escape all meaningful review. 

And with a "public-private partnership," we would be insuring their investments and they would basically be giving us chunks of their surplus dollar reserves in hopes of staving off total failure of these investments. What happens when–as the economists who predicted this crash expect–the banks are ultimately nationalized? What will we owe Kuwait or Singapore at that point?

I’m not sure that Geithner is thinking of partnering with SWFs for this latest TARP. But it’s a question that Robert Reich seems to be pondering. I just wonder whether the whole refusal to nationalize the banks comes out of a last-ditch effort on the part of Geithner and the SWFs to prevent them from losing their shirts.

Update: Here’s a recent WSJ column on this:

How long will Asia’s sovereign-wealth funds remain a sleeping tiger when it comes to their plummeting investments in Wall Street banks?


Ed Greene is a partner with law firm Cleary Gottlieb who has lectured around the country about sovereign-wealth funds and worked as the general counsel of Citigroup’s investment bank until recently. He told Deal Journal Thursday that U.S. banks probably will need to entice sovereign-wealth funds to pour more money in. The enticement this time? “They will look for investments where they can have influence or control,” he said. “The investments where they lost money have been passive.”


If sovereign-wealth funds do become more-active participants in U.S. banks in return for more money, it will provide some interesting twists in America’s approach to foreign investment. When these government investment funds first put money into the banks, the U.S. government wasn’t a fellow shareholder; now, through the TARP $700 billion, it is. The U.S. government will be the most powerful shareholder in these banks. That could result in a certain amount of tension if bank managements, federal officials and foreign shareholders disagree about how best to preserve the value of the banks’ shares. [my emphasis]

37 replies
  1. perris says:

    the real problem is giving the industry that caused the problem a voice in strategy to solve the problem;

    Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.

    smacks of;

    “everyone else pays the risk, private industry reaps rewards if they materialize”

  2. jdmckay says:

    if these investments won’t harm national security, it appears to escape all meaningful review.

    I would say that looks about right. I’d also say it takes kicking-the-can-down-the-road to a more sophisticated, fixed greyhound-chasing-the-automated-rabbit approach. Really to me it looks like latest WS financial instrument wrapped under cloak of US Treasury.

    What it doesn’t do is force the +/- $45t out of black market, onto the books, then… who knows. So it remains in black hole, one so large it’s been sucking the life out of everything since at least November.

    Oh well, at least they’ve got a few months funding or unemployment checks now.

  3. jonL says:

    I am in the finacial industry. Quite frankly none of this is going to work and when it appears that it is working it really is not. For a complete perspective on this visit Japan’s economic shit from the 80’s to the 90’s. Zero percent interest rates and gov’t intervention was of little or no value. In a nutshell Japan’s problems were bad real estate loans followed by gov’t intervention by attempting to prop up insolvent banks and bad management. Sound familiar. The bank’s assets were never dealt with in the proper manner. Here today these major banks are insolvent. The correct way out of this and simlply the only way is to put them all in bankruptcy. Yes, there will be major pain. We are feeling major pain anyway. However as we handled the savings and loan crisis all bad assets were put into the RTC. The gov’t did not buy them.The only bailouts were to the owners of accounts at these insolvent s&l’s. These bad assets were sold by the RTC at whatever the market would bear. Wow, that was simple. Now they quickly found out what the fair market value was and we all moved on. Who gets hurt here. Not the taxpayer or the little people. Shareholders yes. Bondholders yes. Managenment abso-****in-lutely they deserve it. Now we do not need TARP here and the problem is solved.

    • jdmckay says:

      Here today these major banks are insolvent. The correct way out of this and simlply the only way is to put them all in bankruptcy.

      Yes… AFAIC, aside from strong econ theory, that’s just common sense.

      The hardline repub credit legislation @ behest of $$ donations from these same banks should get some of their own medicine. Looks more like their getting the morning after pill on public financial medicare.


      We need to be asking who is profiting from the current crisis (especially over the last 6 months), and who is responsible for it?

      We already know, and they’ve been recruited to run US Treasury.

  4. bobschacht says:

    We need to be asking who is profiting from the current crisis (especially over the last 6 months), and who is responsible for it?

    Is this another example of socializing the risk, and privatizing the benefits?

    Bob in HI

  5. Hmmm says:

    Watching Geithner now in the Senate hearing, he’s so cagey about so many aspects that it’s hard to tell what the hell his actual plan is — and I would be very, very surprised if the folks who think maybe there isn’t any real plan in there turn out to be correct — but the SWF hypothesis seems fully consistent with the testimony.

    Wow. What if this is the Big Secret Honor Idea behind the Bush years? — Throttle back US worldwide aggression by giving other countries a direct kill-switch on the US economy?

    Less fancifully: I can imagine that the SWF’s large investments in the US financials could actually make great sense if they came with a first-position in event of bankruptcy; that would allow them to pick up the whole company for a song. I can also imagine the SWFs as a bloc exerting influence to prevent the banks from lending to one another despite receiving the first TARP traunch — pressure play there, and it would explain the otherwise inexplicable unresponsiveness of the banks to everyone who desperately needs for credit to free up. (At the risk of appearing like a jingo:) They don’t live here, what do they care for the problems of ordinary Americans?

  6. Hmmm says:

    Krugman asks:

    3. Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.

    In testimony Geithner just refused to answer that — when it was asked in the hypothetical — by saying he was not going to make statements about any particular company. DANGER DANGER DANGER there, eh?

      • Hmmm says:

        Heh. Insert obligatory beverage offer/answer here. (Which BTW it would be an honor to share with you in real life at some point.)

    • Professor Foland says:

      If you believe this was the act of a single actor, I believe the number of foreign actors with $550BB worth of mojo can be counted on one finger.

      Remember though, apparently the Fed believed the number could reach $5TT by the afternoon, and the number of entities that could do that can be counted on zero fingers. However, information-cascade herding could easily do that.

      All that said, I’m surprised Kanjorski’s remarks haven’t gotten more play (along with the infamous “martial law” presentation.)

      And also: given how much paperwork is required if I want to withdraw $10,000 (remember: the original charge against Spitzer was going to be “structuring”), it’s not possible that the relevant people in Washington don’t know exactly who was doing all the withdrawing.

        • Professor Foland says:

          In other words, “information cascade herding” is grant-writing speak for “describing a run on the bank”.

          We have a winner!!!!!

          But the paper is worth reading anyway–it points out that the behavior can in fact be totally rational.

          • scribe says:

            Just because the herd moves one way, doesn’t mean it’s wrong.

            And, if you can’t see the car wreck up ahead but move over a lane like the guy in front of you just did (particularly if you know this road is treacherous), you’re being rational, too.

      • Hmmm says:

        Oooh, I love it when you talk quanty. Just to steer the thinking, how much ya reckon the SWF’s could have had in US mutual funds, max, at the time? Also a) I would definitely not rule out a coordinated simultaneous move by many different countries’ SWFs, and b) was there even enough time for an info-cascade effect to play out? I didn’t know there was infrastructure for AI-controlled trading in mutual funds, which I guess is what would have been needed for that to happen. And yes, I’m sure the who-part is known to somebody, just not us, and that if we knew the who-part then we’d be a long way towards figuring out the why-part.

        …Did I mention how tight-lipped Geithner is?

        • prostratedragon says:

          [Really more general than a reply to Hmmm]

          Brad Setser’s a go-to guy on sovereign wealth funds. From what I’ve seen from him over the last year or so, it’s not clear that they could be persuaded back in on the scale of 00s of $B; they might still remember what happened the last time, which was only last year.

          Meanwhile Roubini, who has frequently partnered with Setser on papers and used to partner in blogging, is of the opinion that the obstacle to nationalization is political, and that’s just the way it will have to be for a few more months: unless we experience a miracle, we’ll just have to hope that we’re not peering out of the Marianas Trench by then.

          CR, who reported this, also has an interview with Obama in which he clearly displays familiarity with the Japan and Sweden experiences of recent banking crises. Though the Japanese experience of a decade or more of lost productivity is clearly to be avoided, Obama says that the Swedish experience of relatively rapid recovery through temporary nationalization of banks and aggressive government management is not presently available to us here in Anatevka America: it is against our traditions. This last, CR interprets as Obama saying essentially the same thing that Roubini was saying, which is a reasonable interpretation since Prez clearly does know of the superior example.

  7. scribe says:

    One is compelled to wonder whether the same people behind the electronic run on the bank in September, which Kanjorski described on CSPAN to absolutely no notice and which would have collapsed the US and world economies in a day, are the same people behind the sovereign wealth funds.

    I for one would love to find out where that $500 billion went. Kanjorski has done us a huge favor, which we need to recognize and exploit.

    And, for that matter, one is compelled to wonder who it was that had enough money last summer to drive the price of gas to $4-plus a gallon. Speculating in oil futures to that extent (it looks to me like a failed attempt to corner the market) costs a lot of money. Could that $500 billion have been needed to meet a margin call (as the prices of oil were crashing in that time frame)?

    And, to think we almost lost Kanjorski, a Dem who by all appearances is sane and responsible, to the wingnut Mayor of Hazleton, PA, Princess Judi Stish Giuliani’s hometown, a full up clown of a guy who made his wingnut bones by making it illegal in his town to do any commerce (particularly, like, renting a place to or hiring) any immigrant he deemed illegal. (An ordinance which ultimately got tossed in the courts.) He got that through by making blaming a couple guys with Hispanic names of the murder – in which charges were ultimately dropped by the D.A. for a total lack of evidence – of a local. Then, last year, a group of punks from a town a few miles down the road – spouting the same nativist crap as the Hazleton mayor (then running against Kanjorski) – stomped a Mexican guy to death.

    We should be thankful it isn’t worse.

    • jdmckay says:

      And, for that matter, one is compelled to wonder who it was that had enough money last summer to drive the price of gas to $4-plus a gallon.

      AFAIC, that was mostly unregulated hedge funds.

    • NCDem says:

      In answer to your question… I would suggest we look at Russian finance. We did almost the exact same move on Russia under Bush 1. Donald Regan started the process under Reagan but finished it under Bush 1. We went after the financial system in Russia and took it down. It may be pay back time here as well as in Afghanistan from the 1980’s.

      I think one of the reasons the Russian finances are in dire straits today is that they may have hedged too far on oil in order to drive up prices. This part of their international scheme appears to have failed. Now we both may be third world economies.

  8. Hmmm says:

    Or maybe it’s just good old fashioned home-grown economic terrorism:

    Some people claim the Republicans economic plans have failed. Nothing could be further from the truth. We needed to crash the real estate and construction industry to end opportunity for the illegal immigrants who were destroying our schools and health care. The Republican plan is working.

    Yore Pal, Dana Rohrbacher

    • Hmmm says:

      Retraction: Ach, on further clicking-through that was satire and not actual ordinary Rohrbacher asshattedness; sorry sorry sorry!

  9. Kathryn in MA says:

    First, airplanes aimed at the capitol, then an economic 9/11. We better start reading Tom Clancey novels to see what is coming next.

  10. Hmmm says:

    The part of the spontaneous herd theory I don’t get is: Why would the herd move suddenly over 2 hours, and how would the members of this herd have been able to even see what the others were doing, in order to trigger the herd movement?

  11. masaccio says:

    I’d been thinking about the possibility that nationalization would be a real problem for the guys Paulson talked into investing in our bankrupt banks. I bet we’d have to buy them out.

    • Hmmm says:

      Insofaras we don’t seem to know for sure whether the first-traunch recipient banks are still holding onto that money, maybe some of that has already happened. And embarrassment is why they won’t tell about it.

  12. prostratedragon says:

    Good news: William K. Black is blogging at HuffPost. Hopefully he will do so regularly for the duration, unless the Obama adminstration calls him in. (They could do a lot worse, and apparently have.)

Comments are closed.