In late 2007, there were two big themes which dominated the newsflow: the continuing impact of subprime on the world’s biggest banks and the rise in the east of Sovereign Wealth. The two trends, of course, have been converging for some time. Now is the time, perhaps, to take stock.
John Plender, writing in Thursday’s FT, cuts to the chase:
When financial market bubbles burst, a transfer of assets from the weak and undercapitalised to the strong and liquid invariably follows. The unprecedented scale of the credit bubble that burst last August suggests that the extent of the resulting wealth transfer will beggar belief.
Witness: A $7.5bn capital injection for Citi from Abu Dhabi Investment Authority; $5bn for Merrill Lynch from Singapore’s Temasek Holdings; $5bn for Morgan Stanley from China Investment Corp; $10bn for UBS from Singapore’s GIC and $1.5bn from Saudi Arabia.
Say’s Plender:
After the experience of Enron, the Big Four firms are hell bent on providing a pro-cyclical twist to a dangerous financial downturn to protect their backs.
Thus…
…a malign impact on the real economy where the banks will themselves induce a second round of asset transfers from weak to strong as they tighten lending conditions or put in insolvency experts, especially lower down the business scale.
The one certainty is that much more capital will have to be raised.