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05 March 2024

Now the 'finance vultures' fly West

By Paul Murphy


Ever heard of a phenomenon called “vulture tourism”? I first came across the phrase about a decade ago. As the domino-style collapse of currencies spread from Thailand, through Malaysia and Indonesia, up the Pacific Rim and then across into Russia – collectively known as the Asian financial crisis – there was a rather heartless response in Western centres such as London.

This crisis was an opportunity. This was a chance to get something on the cheap.

As the economies of the East roiled in crisis, the ensuing collapse in tourism and air travel brought prices rattling down. Suddenly, Western tourists could visit Eastern jewels at a fraction of previous prices, travelling upper class and staying five-star when they arrived.

Vulture tourism was soon followed by “vulture finance” as Western financiers applied the same logic to depressed Eastern asset prices.

Heartless? Certainly – and carrying an aggressively Anglo-Saxon capitalist label. But this development also carried health benefits, of a sort. The flow of opportunistic money from West to East established a floor for prices. It was a signal, albeit a stark one, that the economies of the East had a future.

Fast forward 10 years and it is pretty clear what we are experiencing now is a very similar flow of money, but in the opposite direction.

The weekend saw a fresh set of gory financial headlines as the New York Times reported the mighty Merrill Lynch is now expected to report sub-prime-related losses of $15 billion (Dh55bn) – double previous estimates. This was accompanied by reports Merrill would be looking East to mend its broken balance sheet – seeking fresh equity from one of the sovereign wealth funds of the Middle East or southern Asia to recapitalise its banking business. It is Western institutions that are on their knees this time around, drawing the attention of much better capitalised investors from the East.

The difference this time around is that no one is using the word “vulture”. Rightly or wrongly, those banks in trouble in the US and Europe do not consider themselves to be subject to a “rescue” by smart opportunistic investors from the East. They do not feel they are selling the crown jewels of Wall Street and the City of London on the cheap.

There are many in New York and London who think the sovereign wealth funds (SWFs) of the Middle East and Asia are actually paying the wrong price – that the sub-prime crisis will cut valuations further, leaving the new money of the East looking painfully naïve. What is more, there is an assumption in New York and in the capitals of Europe that at some stage very soon a political bachlash will kick in – that rhetoric from the US Congress and from populist leaders in Europe, such as from Sarkozy in France, will impose a natural cap on the influence that Eastern sovereign funds might be able to wield with their new investments.

The underlying assumption, therefore, is that not only are SWFs paying the wrong price, they are also failing to acquire the true “ownership” that their money should buy.

This will probably sound mind-bogglingly arrogant. And it is!

It assumes the current crisis in the West is a static affair, a short-term occurrence that can be carefully and accurately framed. Wall Street banks trip up. Petro and other “export” dollars pay for the sticking plaster. Wall Street banks clamber back to their feet. Hegemony resumed.

What this breezy self-confident assessment misses is that the very act of investment tends to create wealth. That is why people and institutions put their money to work – to make more money, thereby securing their future.

Whatever the political backlash in the West, the fact is money from the East is being invested now at hugely depressed asset prices. Money from the East is going “on risk” just at the moment when money from the West is restricted from doing so.

Any financial textbook will tell you that this constitutes a "good investment”. Full stop.

For now, the rhetoric remains obfuscative. When Citi managed to sell a lump of itself, on a deferred basis, to Abu Dhabi recently, it attempted to present the terms of the interim pricing as though the US bank was getting fresh money at a cheaper rate than if it had simply sold fresh equity.

Citi bridled at the “junk” rating associated with the 11 per cent coupon it is now paying to its Middle Eastern benefactor. But that’s about three times what Abu Dhabi’s investment managers might have got from investing in US Treasury bills. It stands as an impressive return on the risks taken. Taking well-aimed risks with your money brings above-average returns. It brings about a transfer of wealth. It changes the relative balance between the “haves” and the “have-nots”. As simple as that.

Given the sums involved, given the distressed state of Western asset markets, and given the bold timing of Eastern SWFs, what we are looking at here is a huge and sustained transfer of wealth from East to West.

Pretending otherwise is delusional.
(Paul Murphy is the Associate Editor of the Financial Times)