Merrill Lynch and Citigroup are looking for new capital from international investors, primarily government investment funds. The Wall Street Journal reports (subscription required) that foreign governments have already invested $27 billion in Merrill, Citi, UBS and Morgan Stanley.
Although the hand-wringers will worry, this is good news for the economy. The Journal story captured the key element:
It’s better for capital-short banks to raise money from investors than
to sell assets and cut back on lending — thereby spreading the credit
crunch from Wall Street to Main Street.
In case you’ve been vacationing on the Planet Zorg, the smart money has been losing money on their mortgage-related activities. But banks need capital to keep up their good work. Commercial banks with inadequate capital cannot make new loans. Investment banks with inadequate capital cannot underwrite new securities. This is the way that the credit crunch could trigger a recession.
Your economic forecast should be more optimistic if these banks can get the capital they need.
What about the downsides? One worry is that the banks would become instruments of foreign governments. However, those government investment funds will have minority interest. If they want the banks to put politics ahead of profits, the majority investors won’t stand for that. Does that mean that the banks might do business that doesn’t help the good old U. S. of A.? Right now the decision making process at the banks is simple: How much return? How much risk? Read those two questions carefully and you find no reference to national interests, the administration’s foreign policy goals, or what sounds nice to Bono. The big banks are not now trying to advance U.S. national interests, so there won’t be any change in goals with the foreign investors.