You may recall that when we first started hearing about the US subprime crisis, much of the news related to Bear Stearns, and how two of its hedge funds were set to collapse, so bad was their exposure to subprime.
Bear Stearns is the fifth biggest US securities firm. Until problems fell on the company, it was something of a star. From 2005 to 2007 it was voted Fortune magazine’s most admired securities firm, for example. But right now it’s in trouble. Just a few days ago it announced a 62 per cent collapse in its quarterly profits, falling to $171m.
What it could really do with is a nice injection of cash, and a white knight taking a sizeable chunk in the firm, to send out a message of stability.
Yesterday the rumour mill was grinding out talk that the most admired of all white knights was considering taking a stake; Warren Buffett, the man known as the Sage of Omaha, the guru of investing.
On the rumours, the share price in Bear Stearns shot up, and in the process Joe Lewis, the man who owns Tottenham Hotspur, made himself a paper profit of $135M. The British currency trader had bought a 7 per cent stake in the firm just a few weeks ago. Interestingly, at first it seemed like his investment was a bad move, since the big fall in profits was announced after he made his gamble.
Here’s a question for you to ponder. What do Bear Stearns’ CEO James E. Cayne, Joe Lewis and Warren Buffett have in common? Answer they are all fans of bridge. Some are suggesting that it’s this common interest that is bringing them together.
Then again, there are lots of reasons why Warren Buffett probably won’t take the stake. For one thing, the great man regularly says he won’t participate in bidding wars or acquisitions. Secondly, he has never been a great fan of investing in investment banking and when he did dip his fingers in, buying a stake in Salomon Brothers in 1987, the investment later became known as one of his less-shrewd moves. Besides, can you really imagine Warren Buffett investing in a company because he has played cards with the CEO a few times?
But, what’s more interesting about the rumours relating to Bear Stearns is this. The press have been focusing on Warren Buffett and have given only modest coverage to the fact that rumours also suggest that the China Construction Bank is considering taking a stake too.
China is taking a new approach to its foreign investment strategy. US treasury bills and other bonds are losing popularity and, instead, China and its companies, flush with cash, are looking to take equity stakes.
Moving forward, the change is highly significant. In recent years China may have been busy buying US, and indeed UK, assets, but they were safe, boring assets, offering lousy returns. US and British investors, on the other hand, were buying equity stakes in China. China may have been investing more money into us than we were into China, but our investments carried more long-term value.
This is changing, and in the long-term, as China reaps the rewards of its new investment strategy, the pound could come under severe pressure.
But, in the short-term, China is more akin to the US cavalry, coming over the hill, trumpet blaring out, while the Western banks sit in a circle, surrounded by panic and with limited ammunition in the form of liquidity, to fight back.
It has also occurred to us that China’s decision to push less money into the money markets may be a contributing factor behind the money markets’ panic. Now there’s a theory you won’t have read anywhere else. If, when the dust settles, it does appear China’s changing strategy was behind the money crises, then think of us, won’t you? If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link
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