With Wall Street in tatters, will foreign banking concerns swoop in and cherry pick the leftovers?
There is some evidence that is happening. Japan's huge Mitsubishi UFJ Financial Group is picking up 20 percent of Morgan Stanley in a deal valued at $8.5 billion. MUFG will also likely get a seat on Morgan Stanley's board, pending approval by regulators.
The move came just after investment banks Morgan Stanley and Goldman Sachs said they were becoming holding companies. As such they can participate in the $700 billion federal bailout but are subject to more regulation.
In a separate move, Japan's Nomura Holdings will buy the Asian operations of bankrupt Lehman Brothers. French banking giant BNP Paribas has bought Bank of America's prime brokerage unit that caters to hedge funds, although the deal was actually finalized in June several months before the current financial meltdown. Societe General, another French bank which already has a strong position in the U.S. bond market, is said to be interested in expanding into various investment banking and equity derivatives.
It's not hard to see why there's interest. U.S. entities can be had for fire sale prices and are way undervalued. The only factors that could hold up more foreign intrusion are the possibilities of nationalist backlash in the U.S. and the fact that Asian and European banking sectors are being slammed as well and are short of cash as they seek their own government bailouts.
Europe, for instance, is in the midst of its own meltdown and shakeouts. In Belgium, for example, BNP Paribas has bought 75 percent of the faltering Foris, that country's largest financial service firm.
In Russia, which has closed its stock markets this week because of trading chaos, Onexim Group, an oligarch-led conglomerate, is snapping up a 50 percent chunk of Renaissance Capital.
In what has to be one of the more unusual moves, Iceland this week asked Russia for a loan of about 4 billion euros or around $5.5 billion to shore up its credit-squeezed banking sector. The request seems especially surreal considering that not that long ago, Iceland was a key base for NATO and U.S. forces to seal off Soviet submarines in the North Atlantic and was a possible staging area to supply NATO if the Soviet Union invaded Western Europe.
Today, Moscow may even have its eyes on U.S. banks. Russian President Dimitri Medvedev reportedly told oligarch Mikhail Fridman, head of the congolomerate Alfa Group, that maybe now is the time to head to New York for some bottom fishing. "Maybe we should also be something while it's not too late," Medvedev reportedly said.
To be sure, foreign ownership of and positions in U.S. baking entities is hardly news. Roughly $1.3 trillion has flowed back to the U.S. in the form of Treasuries from the Chinese export machine over the past decade.
And last January, Citigroup announced that it had sold a 7.8 percent stake worth $14.5 billion to a group of governments incluing Singapore. One prinicipal investor is Saudi Prince Alwaleed bin Talal who is hardly a stranger to U.S. investing. Oil-rich Dubai picked up a 19.5 percent stake in the Nasdaq stock market last year.
Does this mean that we'll all be drinking French champagne and eating Russian caviar once the meltdown cools off? Maybe not, considering that a couple of factors might temper foreign ambitions in the U.S. financial sector.
One is latent nationalism. Indeed, the spate of foreign money flowing into the U.S., especially from soveriegn wealth funds, has Washington politicians such as Alabama Senator Richard C. Shelby, a Republican, calling for investigations. There was an uproar a few years ago when China's state oil company tried to buy part of a U.S. oil firm. And when Dubai wanted to take over operations of some major U.S. ports, the deal was killed by the political backlash.
The other problem is that's a big limit to what the foreigners can do since their own problems have left them strapped for cash. Most of Europe, save for Germany, is looking at sagging economic growth and tanking stock markets. Russia has been drunk on its oil exports for several years now, but with oil prices, that binge is coming to an end. Russia's dollar-denominated RTS exchange has been down 17 percent or more for the past week. Middle East nations still have plenty of oil wealth, but the recent drop in oil prices does narrow possibilities.
The "America First" cries are silent now, but they are certain to come back once the financial storm runs its course. My guess is that they'll be more foreign investment in U.S. finance, but it will be more limited than you might expect.