Monday, December 10, 2007

Sub-prime mortgage loss and SWF (Sovereign Wealth Funds)

Who would have imagined that the sub-prime loss could have caused such a punitive damage in less than one year wiping off the previous year's profits. Some of the numbers as stated by BBC on the write offs by high profile financial institutions that bundled these complex loans are listed below.

UBS: $13.5bn
Citigroup: $11bn
Merrill Lynch: $8bn
Morgan Stanley $3.7bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
BNP Paribas: $2.1bn
Freddie Mac: $2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $1bn


While few selected quarters discuss how the voluntary rate freeze would help, its really the monetarist theory at work where SWF's play the role of the FED, of course, for their own benefit. Though this is capitalism at work again, I wonder if these SWF's are not asking the same question and how far have they looked into their supposedly revenue generating machine, ie the companies, they just rescued. Since no medicine has been applied to the fundamental problem, within the realm of my knowledge, I am yet to understand how these investments would meet their expected returns. Only thing that stikes is CIC's rescue to Blackstone causing the former to lose 40% of its investment value due to continued poor performance of Blackstone. We will have to wait and see on case by case basis as US economy struggles to come out of this web.

As per estimates from Morgan Stanley, these SW funds have spent $35 billion since the start of last year on stakes in financial organizations, with $26 billion coming in roughly the last six months. Abu Dhabi's planned $7.5 billion investment in Citigroup is one big part of it.

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