Lehman Brothers: When Foreign Money Stays Home

The financial minds over at Lehman Brothers have spent the day looking for money — lots and lots of money. The investment bank revealed Wednesday that it's facing a loss of $3.9 billion in the third quarter of this year. The news came after Lehman's stock fell 45 percent (yikes!) after reportedly failing to get new investment from the Korea Development Bank.

In short, Lehman's in a pickle.

If Lehman had faced this problem a year ago, something called a Sovereign Wealth Fund might have ridden to the rescue. Sovereign Wealth Funds are the agencies that countries use to invest their money. As big banks and investment firms struggled this winter, says analyst Rachel Ziemba, SWFs pumped some $34 billion dollars into struggling U.S. banks. It sounds like a lot, but it's not enough. "That's less than a quarter of the capital raised by U.S. institutions since the onset of the crisis," she says.

What's more, foreign countries generally invested in the U.S. without asking for any control. Lehman Brothers could use that kind of deal right about now, but Ziemba, who works with Nouriel Roubini's RGE Monitor, says American banks can't expect that treatment to continue.

Ziemba says foreign investors may feel burned by the current instability of American financial systems. Some, like China, are holding billions in Fannie Mae and Freddie Mac bonds — bonds that used to be worth much more. Instead of ponying up, she expects foreign investors to start heading for the sidelines. It's only natural. "Because of the size of our market, we have had the surprising ability of a debtor to set the terms," she says. "We may not be able to dictate where they put that money anymore."

Trust us: Ziemba gets it. After the jump, links to the world as she sees it.

 

Who's Going to Bail Out the Banks?
She and Roubini write: "[T]he wealthiest country in the world may no longer be able to afford to be so picky about who rides to its rescue and on what terms."

Bear: A Road Not Taken
Covering the Bear Stearns collapse, Ziemba writes: "One of the criticisms of sovereign funds is that they tend to support management and the boards of institutions by being (relatively) silent long-term money. This is a time for active management."

So How Large Are Sovereign Wealth Funds?
Smaller than you might think, Ziemba writes, with new assets on the order of $400 billion last year. Their total assets barely top $2 trillion: "[S]overeign funds at present might be neither as big as either those who see them as saviours hope nor their detractors fear."

What Are Gulf Cooperation Council Funds Buying?
For now, the big oil states are still pumping lots of money into the U.S. But Ziemba writes that they're showing new interest in so-called emerging markets, places like Sub-Saharan Africa, Latin America and Eastern Europe. So are Asian states. They're "diversifying their holdings and taking larger stakes."