In 2008, Libya entrusted Goldman Sachs with $ 1.3 billion taken from its sovereign wealth fund. Bad move! The chief investment officer of the Libyan sovereign wealth fund, Libyan Investment Authority (LIA) approached 25 different U.S. financial institutions in mid 2007 when the fund was set up with initial asset of $ 40 billion. What was later revealed was the fact that Goldman Sachs ended up losing 98% of the investment, leaving Libya with only $25.1 million, or 2% of the initial investment.
In order to make up for the loss, Goldman Sachs in 2009, presented the Libyans with a proposal of receiving $5 billion preferred shares of Goldman in return for an investment of $3.7 billion. A proposal for a payment of 4% and 9.25% on the shares annually for 40 years to the Libyan Investment Authority, which would eventually successfully pay off the loss of 98% of their prior investment. The $5 billion stake in the company would have made the Libyan Government one of the biggest shareholders of Goldman Sachs. The deal fell through, and two years later we are at war with Libya. Imagine if the Libyan Government, which is now officially an “enemy” of the US, was one of the largest shareholders in arguably America’s most important and powerful investment bank?!
The fact is that many of the U.S. companies have foreign investors as one of their biggest stake holders. To mention a few examples, China State Investment Company owns 10% of company shares of Blackstone, a private-equity firm, which was purchased for $ 3 billion. In 2008, at the height of the global financial crisis, MITSUBISHI UFJ FINANCIAL GROUP, INC. (a massive Japanese financial instiution) purchased $9 billion worth of in Morgan Stanley. China purchased $9 billion worth of Morgan Stanley, Citigroup and Bank of America. According to Economy in Crisis, foreign ownership of U.S. companies (50% or more company shares owned by foreign investors) is 11% in the Finance and Insurance industry, 24% in the Information industry, 20% in both the Manufacturing and the Professional, Scientific, and Technical Industry, and finally 27% in the Mining industry. The figures have probably gone upsince the figures are only as of 2002. But the point still remains that such high percentage stakes in major U.S industries can be a matter of national security.
This year has been a record-breaking year for initial public offerings with companies going public via SPAC mergers, direct listings and standard IPOS. At Techlive this week, Jack Cassel of Nasdaq and A.J. Murphy of Standard Industries joined Willem Marx of The Wall Street Journal and Barron's Group to talk about companies and trends in Read More
As stated above, the highest percentage of foreign owned U.S companies is in the mining industry. U.S. environmentalists argue against some uranium projects, oil drilling, fracking associated with natural gas, and other potential environmental concerns. I am not taking a side on the environmental issues, but the fact is disconcerting. The effort of putting an end to the project is hindered by the high ownership of these mining companies by foreign individuals. The foreign ownership allows for them to take the uranium and other hardrock minerals without them paying the taxpayer compensation. Furthermore, it leads to uncontrolled ownership of such resources by countries that have stakes in these U.S mining companies.
The high percentage stake of foreign investors in U.S companies is a mixed bag. While, the US consumer is depressed right now and not spending heavily, other countries can take advantage and buy cheap assets in the US. A recently Bloomberg article highlighted the fact that the rise in the Brazilian real, and Brazilian real estate is causing Brazilians to purchase distressed US properties. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes (in the Miami area). This not only helps reflate housing prices, but increases tourism and consumption of other US goods, as foreign citizens go on vacation in their second homes in Miami or elsewhere. Brazilians spent an estimated $1.14 billion in the Miami-Dade area on hotels, restaurants, entertainment and shopping in 2010. This also has been good for airlines, as direct fights from Brazil to Miami have increased as a result of this housing surge.
The biggest issue is the defense industry. I discussed the matter with my colleague Ben Strubel of http://strubelim.com/wp/blog/
He stated that: “There are no laws directly prohibiting foreign investment in defense contractors or other companies but there are laws that allow the president and Congress to block any transactions. The Committee on Foreign Investment in the United States (CFIUS) was formed as part of the Exon-Florio Amendment that gave the president power to oversee foreign investments. The Foreign Investment and National Security Act of 2007 also strengthened existing laws. Finally some transactions may be affected by the National Industrial Security Program and the Foreign Ownership, Control, or Influence (FOCI) program which is overseen by the Department of Defense, Department of Energy, CIA, and Nuclear Regulatory Commission.”
The issue is very complex from the data which I looked at. However, it is not far fetched to see some political muscle used to bribe officials to be lax on this issue. Furthermore, there are companies like Boeing that produce both civilian and military products. China, with its $3 trillion in foreign reserves could easily buy out Boeing and other companies. I doubt the US would ever allow that, but there is nothing stopping them from gaining a large stake. The defense industry however, is well protected by US laws. Some vital institutions like banks and media companies, have large stakes owned by non US citizens. At times by individuals or Governments that are hostile to the US. This should be an area where Congress takes some action.
Another matter of concern is the ownership of U.S debt by foreign investors, especially public entities of other countries which make up for 40% of the total debt (CNBC). Elaborating on the debt holding of some of the major public entities, Hong Kong holds around $138.9 billion, Brazil currently has an all time high U.S debt holding of $184.4 billion, Oil exporters (including countries such as Ecuador, Indonesia, Iran, Iraq, Kuwait, Oman, Saudi Arabia, the United Arab Emirates, Libya, and Nigeria) have $210.4 billion worth of stake in U.S debt, The UK holds $511.8 billion. Japan has and still is one of the largest U.S debt holders preceded by China with approximately $906.8 billion. At present, two-thirds of the total $14.3 trillion of U.S debt is being financed by foreign entities with China holding around 10% of the total debt. This has become one of the main concerns for Americans as it poses high national security risk due to heightened dependency on foreign countries. Although, it did not get media attention, China used its holdings of US debt to threaten the US on foreign policy issues, such as sales to Taiwain, and domestic economic issues. The best way for the US to deal with the problem of foreign holders of US debt, would be to start reducing the amount being issued.