Money And Influence In The Global Village

December 25, 2007

No. 40

Money and Influence in the Global Village Shmuel Even Relations between trans-national corporations and states have become more significant in the era of globalization. The corporations transcend borders and operate as a global network while states are still defined by territory. But in the past few months, we have seen some interesting transactions involving the purchase by states of chunks of global financial corporations that have run into liquidity problems. This phenomenon attests to the weakness of corporations, at least temporarily, but also to the acknowledgement by states of the global influence of corporations, and not only in the economic realm. If that is the case, it means that the financial market has joined the battlefield and UN voting as a theater in which political influence can be acquired. The transactions, each one amounting to at least $5 billion, have generally been carried out by government investment funds. For example, the Abu Dhabi investment fund has injected $7.5 billion into the financial giant Citigroup through the purchase of convertible bonds that allow it to convert the loan into 4.9% of the bank’s stock. Similarly, China’s investment fund has paid $5 billion for 9.9% of investment bank Morgan Stanley’s stock. And Singapore’s investment fund will pour $10 billion into UBS and $6.2 billion into Merrill Lynch. It is striking that these are all non-Western states that have accumulated huge foreign currency reserves. For example, Abu Dhabi’s reserves have grown thanks to the surge in oil prices (the United Arab Emirates’ income will surpass $70 billion this year). China and Singapore are enjoying rapid economic growth and China’s foreign currency reserves ($1.5 trillion) are the largest in the world. Hundreds of billions of these are invested in U.S. Treasury notes. Those raising the funds are banks that have suffered huge losses in the sub-prime mortgage crisis, stemming from large investments in funds exposed to losses on mortgages extended to problematic borrowers in the United States. As a result of rising interest rates in recent years, the ability of those borrowers to repay their mortgages has declined and the number of non-performing loans has risen significantly. The drop in real estate prices over the last year has further aggravated

1

the situation, since housing provides collateral for the mortgages. The crisis has forced financial corporations to write down their capitalized value and their market value has dropped by billions of dollars. For example, Citigroup’s market value has dropped by about 43%, from some $270 billion at the beginning of 2007 to about $155 billion now. On explanation for the foreign investments is purely economic, that is, the investors see the fall in stock prices of financial corporations as an opportunity. That explanation is, however, not self-evident since investment in these corporation is now considered risky and most governments tend to invest their foreign currency reserves into solid investments. In September 2007, the government of China even took the trouble to make clear that its foreign currency holdings are not exposed to the market for mortgages to problematic borrowers in the U.S., to which these corporations are exposed. Another economic consideration – at the strategic level – might be that those states rushed to shore up the corporations out of fear of the consequences of collapse for their own economies, either directly (because of involvement by the corporations in their domestic economies) or indirectly (because their own rapid growth depends on the economic health of the west). A different sort of explanation could be the recognition that these corporations are powerful forces in the international system, even in the political sense. The extent of their financial activity is clear from their annual reports. At the end of 2006, for example, Citigroup’s balance sheet showed $1.88 trillion in assets (such as cash, investments and loans extended) along with $1.76 in liabilities (such as deposits and loans taken). These figures exceed by far the budget of every country in the world except the United States, whose expenditures in 2006 came to $2.65 trillion. The transactions under discussion do not necessarily signify the desire of these states to take control of global corporations. According to published information, the Chinese will apparently not get a seat on Morgan Stanley’s Board of Directors and Abu Dhabi will not get a seat on Citigroup’s Board. Nevertheless, the deals do give the investing states a toe-hold that could be expanded through additional investments or cooperation with other shareholders. Abu Dhabi, for example, is not alone in Citigroup; Saudi Prince al-Waleed Bin Talal is the largest private shareholder in Citigroup. In other words, Abu Dhabi’s investment strengthens the presence of Arab oil-producing states in the global corporation. In normal times, these investments might well have run into fierce criticism in the west, but given the sub-prime crisis, it is difficult to attack anyone who rescues global banks from their difficulties and indirectly even helps the Bush Administration, which is trying to solve the crisis without leaving many Americans homeless or seeing it spread to other branches of the economy. In the wake of these financing deals, the big American banks (Citigroup, Bank of America and J.P. Morgan) have canceled/suspended plans to set up a joint emergency fund, in the amount of $80 billion, to ease the credit crunch in the U.S.

2

Thus, these actions apparently have both economic and political logic. The huge cash reserves held by these and other states potentially allows them to invest more in other types of global corporations, which would give them political influence in the global village. Indeed, it has recently been announced that Saudi Arabia intends to establish one of the largest government investment funds in the world. In other words, the phenomenon is far from having peaked. For Israel, the expected growth of investments by Arab oil-producing states in western companies and global corporations has possible financial and political implications. Even if there is no intention to use the “money weapon,” as was the case during the oil crisis of the 1970s, it is reasonable to assume that many bodies in the west, including those with political influence, will want to finance projects with the help of these corporations and will therefore take into account the opinions of their major shareholders, especially in times of crisis in the Middle East.

3