HOW the world is changing! Not only is its manufacturing axis shifting away from North America and Europe, so too is the control of financial institutions. It is now widely expected that the blue-blood US investment bank, Lehman Brothers, staggering from the loss of $30 billion in the subprime debacle, will cede a controlling interest in itself to a state-owned South Korean bank.
This will be only the latest major rescue of some of the greatest names on Wall Street by non-American investors. Citicorp, the world’s biggest bank, has had to write off more than $40 billion in collapsed loans and has been kept afloat by Arab and Singapore money. The Abu Dhabi Investment Authority paid $7.5 billion for a stake in Citigroup while the Government of Singapore Investment Corporation (GIC) put in $6.8 billion. GIC has also bought a nine percent stake in the troubled Swiss bank UBS — which lost $30 billion in subprime loans — and another Singaporean Fund, Temasek has bought a 10 percent stake in Merrill Lynch which has also sold a $6.6 billion stake to the Kuwait Investment Authority.
Three of the world’s top six banks in market value are now Chinese. Western critics will nod sagely and pontificate that China has its own financial challenges to come. They will also insist that the expertise and financial acumen necessary to succeed in global banking still reside in New York, London, Frankfurt and Tokyo — whose apparently biggest subprime loser, Mizhuo Financial, has “only” lost $6 billion.
All of this, however, begs the question of how these financial experts managed to get their banks and their countries’ financial systems into such mess. Whatever misfortunes struck the great and good of the established financial world, they would have been limited to a large extent had the bankers exercised traditional financial prudence — the most basic tenet of which is that you never lend money to people who have little or no hope of paying it back.
No doubt in Wall Street boardrooms, the hope is that once the credit crunch is over and the enormous number of bad loans they made has finally worked its way out of the financial system, it will be back to business as usual. Such hopes are vain. The world of international finance has changed in a way that is likely to be irreversible.
Now it is widely assumed that some of the outside rescuers are looking to an arm’s-length investment and will not seek to have any impact on the future day-to-day running of these institutions. This is, however, to overlook the important consideration that if, for instance, US investors thought it worth rescuing the Wall Street’s finest, they would have found the cash. In fact they were not prepared to take the risk that some banks would fail. That risk was taken instead by overseas investors who are surely likely to demand an important say in how their banking investments are now run and insist on conservative and responsible behavior.
