The high cost of spending yourself rich

What's a once great investment bank like Morgan Stanley to do when it falls on hard times? Hope that China or a Gulf state is willing to bail it out. But shouldn't we be worried about foreign governments buying up our companies?

This feature is part of our FREE daily Money Morning email. If you'd like to sign up, please click here: Sign up for Money Morning

The whole US growth model has basically been founded on America's consumers exchanging borrowed dollars for Chinese-manufactured goods, and Arab-produced oil. The Chinese and the Arabs then buy US government debt with said dollars, effectively lending Americans the money back, so that they can buy more gadgets and petrol from them.

It might sound like a daft way to run an economy, but all I can say is that it's a good thing that the Gulf States and the Chinese have stockpiled all those dollars.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Otherwise, how would they have enough money to bail out the Western banking system now that it's collapsing around our ears?

Investment bank Morgan Stanley has become the latest western bank to gratefully accept a cash injection from a foreign government.

The group wrote off $9.4bn in the fourth quarter due to sub-prime exposure. The bank had already warned it would write-down $3.7bn in October so that's quite a chunk of extra money to lose in the space of a couple of months.

All the write-downs meant that the bank posted a $5.8bn loss for the quarter, from a $2.6bn profit a year ago, while full-year profit came in at $3.44bn, less than half last year's figure.

What's a once great investment bank to do when it falls on hard times? Why, get the begging bowl out and go east, young man. Just as Citigroup struck a very attractive deal with the Abu Dhabi Investment Authority for its $7.5bn, and Swiss bank UBS pawned a stake in itself to Singapore, now Morgan Stanley has got itself a brand new prospective top shareholder the Chinese government.

In exchange for $5bn from China Investment Corp (CIC), China's sovereign wealth fund, CIC will get, says Tom Stevenson in The Telegraph, "a 9% coupon on convertible shares that will give it a 10% stake in the bank within three years."

So in other words, in exchange for $5bn now, Morgan Stanley will pay China $450m a year for the next three years, after which the Chinese government will own one-tenth of the bank. Morgan Stanley's market cap this morning was around $53bn, even after the shares have fallen more than 25% since the start of this year.

So that doesn't look a bad deal at all for the Chinese. Of course, given China's track record, I'm not sure I'd want to be buying into financials at the moment. The government also took a $3bn stake in private equity giant Blackstone when it floated. That was pretty much the top of the market and its stake has nearly halved in value since then.

Should we be worried about foreign governments buying our companies?

T his does all raise a difficult question though. How important is it that foreign governments are gaining increasing control of key assets across the world?

It's easy to get sidetracked on this topic - on the one hand, we pride ourselves on our free and open markets. On the other, should we be worried about foreigners controlling our companies and the jobs that result from them?

But really, it's not that difficult. As other commentators have pointed out, we learned through a long and painful process in this country that governments are not great at running anything. It's something that somepeople are still learning most notably anyone who still supports the idea that the government should be allowed to build a national ID database.

If we don't trust our own government to run companies efficiently, then it's unlikely that your average foreign government is going to run things any better. And more to the point, while we can kick our own government out (eventually), we have no control over the make-up or in general, the actions of a foreign power.

This isn't meant to be scaremongering jingoism. The point is that through our ill-considered economic policy of "spend yourself rich", the US and the UK in particular now find ourselves in no position to negotiate when wealthy foreign governments want to cherry-pick our assets.

As thousands of homeowners are about to find out, it's never a good idea to be a forced seller. You place yourself at the mercy of the buyer, which is never a good position to be in, regardless of how benign the buyer's motivations are. At best, you'll get a low-ball offer - at worst you'll get completely shafted.

Let's hope that China and all the other sovereign wealth funds are feeling benevolent when they start running the slide-rules over the rest of the West's family silver.

Turning to the wider markets...

Enjoying this article? Why not sign up to receive Money Morni ng FREE every weekday? Just click here: FREE daily Money Morning email

FTSE hit by late sell-off

A late sell-off led by the retail sector saw London's FTSE 100 index give up most of its gains late in the day to end at 6,284, an increase of just 5 points. However, it was a good day for housebuilders as news of the Bank of England's unanimity over this month's rate cuts boosted hopes of further reductions. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 closed 11 points lower, at 5,497. And in Frankfurt, the DAX-30 was also lower, closing down 13 points at 7,837.

On Wall Street, stocks ended a volatile day mixed. The Dow Jones closed down 25 points at 13,207 and the S&P 500 was two points lower, at 1,453. However, The tech-heavy Nasdaq added 4 points to end the day at 2,601.

In Asia, exporters weighed on the Japanese Nikkei following news of falling footfall at US stores. The benchmark index ended the session just one point higher, at 15,031. And in Hong Kong, the Hang Seng slipped 12 points to 17,017.

Pound tumbles on rate cut expectations

Crude oil had extended yesterday's gains and was trading at $91.81 a barrel this morning. Brent spot was at $92.39 in London.

Spot gold was fairly steady at $800, whilst silver had slipped to $14.03.

Turning to forex, expectations of further UK rate cuts saw the pound fall to 1.9912 against the dollar and 1.3878 against the euro. And the dollar was at 0.6967 against the euro and 112.99 against the Japanese yen.

And in London this morning, the Royal Institute of Chartered Surveyors said that, despite some short-term weakness, the property market should avoid a slump in 2008. Despite evidence of falling prices, RICs is hoping that the Bank of England will respond with lower interest rates, and that first-time buyers will 'attempt to capitalise where they have been previously squeezed'.

Finally, our recommended articles for today...

Bad name, poor returns?

- Venture Capital firm NewMediaSPARX has managed returns of just 1.5% a year. Tom Bulford looks at who's to blame for its appalling performance: Bad name, poor returns?

Why now is the time to avoid (most) equities

- The latest efforts to make credit more affordable have failed to help the banking sector. Meanwhile, the weak dollar is causing problems elsewhere. However, there is one place where stocks still have a bright future. To find out where, read: Why now is the time to avoid equities

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.