Faced With Huge Losses at Home, Morgan Stanley Sells Stake to China Investment Corp

Filed in archive News on December 19, 2007

Merrill Lynch got hit. So did UBS and Citigroup. Now Morgan Stanley has announced huge losses as a result of bad decisions in the subprime loan debacle. Morgan Stanley is writing down almost $10 billion in losses, according to a variety of news sources.




Like UBS and Citigroup, Morgan Stanley is looking for help as it copes with the losses. Citigroup raised $7.5 billion by borrowing from the Abu Dhabi Investment Authority. UBS was bailed out by the investment arm of the government of Singapore to the tune of $9.7 billion.

Morgan Stanley has turned to China. China Investment Corp is buying about a 10% stake in Morgan Stanley for $5 billion.

This is the third time in recent weeks that another country's sovereign wealth fund has bailed out a US bank. That worries many people.

Blogger Henry Blodget described the bailout this way:

In a situation that mirrors that of the U.S. macro economy (they lend, we spend), Morgan Stanley shareholders have paid for the firm's gambling losses by taking 10% dilution in the form of a Chinese rescue.

Blogger Mijka Samora had a cute headline on the China stake: Communists Invade Morgan Stanley. Mijka's opinion is stark:

As we previously discussed after Abu Dhabi's 5% investment in Citigroup, our business leaders continue to demonstrate their extreme naivete regarding the impact of sovereign wealth funds. This is a dangerous trend which will cost our country dearly if our leaders do not adopt new laws to limit undemocratic countries' investments in American firms.

An Aussie blogger summed up the controversy well:

The move from the CIC sparked unsurprising controversy, with the pro side saying all is fair in love and war and the con side yelling Red Peril. The Chinese government is, after all, Communist. But the deal is done, and it just goes to underscore the influence we can expect to see in 2008...

I guess I lean more toward the "all's fair" side of that continuum. America's banking industry has screwed up. Having to sell a stake the size of 10% is probably a small price to pay. I don't see that China having a 10% stake in Morgan Stanley will endanger national security. And the truth is that American companies do the same (or worse) in other countries all around the world....