Foreign Investment Drying Up By
Patrick A. Heller, Market Update
July 22, 2008
The current financial crisis over expected huge losses at
Fannie Mae and Freddie Mac, two private companies that hold
about half the real estate mortgages in the United States,
may be the final event that persuades foreign investors and
governments to stop lending to the U.S. government and private
companies, and a resulting redirection of investments toward
"Sovereign wealth funds that invested in U.S. banks
have lost 30 to 50 percent of their investments in the space
of six months, so they're becoming more cautious," said
Nouriel Roubini, professor at the New York University Stern
School of Business and head of Roubini Global Economics.
Sovereign wealth funds, established by Middle Eastern and
Asian governments, control over $3 trillion in assets.
Last week, Kuwait authorities announced its sovereign wealth
fund would no longer buy Fannie Mae or Freddie Mac debt. Instead,
they will boost investments in stocks, bonds and real estate
in China, India and Japan.
Also last week, Merrill Lynch warned that the Fannie Mae
and Freddie Mac mortgage debacle could bring on a foreign
financing crisis within months. The U.S. depends on Asian,
Russian and Middle Eastern investors to fund much of the $700
billion trade deficit. With interest rates so low in the United
States, Alex Patellis, the head of Merrill Lynch's international
economics said, "Foreigners will not be willing to supply
Brian Bethune, chief financial economist at Global Insight
warned that the U.S. Treasury had little time to put real
money behind the rescue plan for Fannie Mae or Freddie Mac.
He said, "This is not the time for policy-makers to underestimate,
once again, the systemic risks to the financial system and
the huge damage this would impose on the economy. Bold, aggressive
action is needed, and needed now."
In total, about $1.5 trillion of Fannie Mae, Freddie Mac
AAA-rated debt as well as other U.S. debt issued by government-sponsored
enterprises is held in foreign hands. How long will these
investors continue to absorb more losses before they bail
Last week, Hiroshi Watanabe, Japan's chief financial regulator,
urged Japanese banks and life insurance companies to treat
U.S. agency debt with caution, an extreme statement from a
nation famous for comments being quite understated.
Rather than disgorge debt at what may be fire-sale prices,
it would be more likely that foreign investors will stop buying
new U.S. debt. Simply stopping the purchase of additional
debt would be enough bring on a major financial crisis. Patellis
said, "I don't see how the current situation can continue
beyond six months."
Already, a rising percentage of the capital of sovereign
wealth funds is being used to purchase gold. As these funds
accumulate more assets, and less of it is used to invest in
the United States, I expect the rate of gold purchases by
these funds to accelerate, helping push up prices over the