Foreign investment: Not that bad

A lot of people seem to be under the impression that every time a Middle Eastern sovereign wealth fund buys a stake in an American bank, the baby Jesus cries.

MoDo's column this morning, entitled "Red, White and Blue Tag Sale," is dedicated entirely to the phenomenon:

China and Arab countries have a staggering amount of treasury securities. And the oil-rich countries are sitting on so many petrodollars that they are looking beyond prestige hotels and fashion labels and taking advantage of the fire sale to buy eye-popping stakes in our major financial institutions.

The Democratic candidates were asked about this at their most recent debate in Las Vegas. Here's Hillary Clinton's response:

Brian, I’m very concerned about this... I think we’ve got to know more about them. They need to be more transparent. We need to have a lot more control over what they do and how they do it. I’d like to see the World Bank and the International Monetary Fund begin to impose these rules, and I want the United States Congress and the Federal Reserve Board to ask these tough questions.

I suppose she deserves credit for being the only candidate who actually answered the question, but boy what a horrible answer. The Federal Reserve? She can't possible think it's really their job to oversee who invests in what.

What I wanted Obama (or Edwards, but fat chance) to say was: "You know what? I actually agree with George Bush on this issue. The bigger problem would be if these funds weren't investing in our banks."

It would be perfect for his strategy of rejecting Bush-hatred, and would have the added benefit of being true. These are large stakes, yes, but they are nowhere near controlling stakes. The most recent Merrill placement didn't have voting rights at all. Meanwhile, our banks really need the money. Beyond the losses they've already taken in mortgage-related securities, they are holding other kinds of debt that's insured by companies like Ambac and MBIA, which are in very real danger of bankruptcy.

Demanding "more transparency"? Yes, let's demand that foreign investors undergo an extensive audit before we give them the privilege of putting billions of dollars in cash into our floundering banking system!

For all the hand-wringing about the size and supposedly favorable terms of these equity deals, Citigroup stock is down 50% in the last six months. Sure, if and when the banks recover as they did in 1992, some of that value will accrue to already-rich oil states, but at the moment they are taking a lot of pain.

In short, while it would make sense to regulate outright acquisition of major banks by government-controlled foreign entities, it makes no sense to make it harder for banks to raise capital wherever they can find it. The underlying problem that created this desperate need for capital had nothing to do with swarthy foreigners, and petrodollars look just like regular dollars on a balance sheet.