Nouriel Roubini's Global EconoMonitor

German Government and Business Responses to Sovereign Wealth

Last week, the German cabinet approved a new takeover law which (primarily) has sovereign investors especially those fromChina and Russia at target. The new law would make it easier to block acquisitions of more than a 25 percent stake in German firms by foreign entities not based in the EU if such a purchase might be deemed to pose a threat to public security or order. This does seem more restrained than previous rumored bills. Germany’s process to implement a takeover law were triggered in part by a Russian bank’s stake in EADS, see here for a summary) and past drafts, which could have blocked other EU member states, were overturned by EU authorities.

German businesses aren’t that happy about the bill even though its thresholds are not necessarily that onerous in comparison to other countries. Many countries and most G10 nations have a threshold above which deals are assessed for security implications. And in many countries (the U.S. for one the barriers for scrutiny are much lower – 5-10%). Other entities assess for competition policy.

This move is reflective of a move towards greater bilateral scrutiny of foreign investment and trade, one prong of a three pronged response to sovereign wealth. With economies slowing there is on the one hand a need for capital and on the other hand asset protectionism maybe a reflex. While it is the regulatory framework financial regulation, ease of doing business and profit expectations that influence investment decisions most, concerns of protectionism could deter investment.

Thomson notes that Temasek’s bid to take over Shipping company Hapag-Lloyd might be an example of a deal that would produce more scrutiny. The Singaporean government investor is one of several bidding for the company whose workers have called on the government to block the takeover.

However, there are clearly some Germany companies seeking out capital or business from sovereign investors – including two that became public this week.

Siemens has reportedly been seeking a Middle Eastern sovereign partner to take more than 3% (the disclosure threshold in Germany). Perhaps attracted by the recent GE/Mubadala deal in which GE gained an investor and a customer (see a past post for more), Siemens might hope to acquire capital and participate in some of the large infrastructure projects planned for the Gulf. Furthermore, a large anchor investor might shield it from activist investors. At the moment the Siemens family with 6% is the only large investor. Of course, for now its not clear that any investors are stepping up to the plate.

Deutsche Bahn, the national railway company just struck a deal with the state of Qatar to build up the Emirates transportation system. The MoU recently signed between the railway and Qatari Diar, the property focused arm wholly owned by the Qatar investment authority, will cover a multi-stage consolidation of Qatar ’s railway.

Both show the increasing role such funds are having with European and American companies – as sovereign investors try to develop expertise, fast-track infrastructure development and diversify from oil.

German car companies are likely also benefiting from some of the $12 billion that the GCC and Jordan have invested in holding car races in auto companies and motor sports related advertising. Abu Dhabi is planning a Ferrari park, its stakes in SR technic and others, Bahrain has its grand prix etc. The FT noted on Sunday that such investment was but one of the ways that GCC countries were branching into sports sponsorship. Perhaps the Olympics are still on the brain. The jury remains still out on the benefits of sports sponsorship, but GCC countries are clearly hoping it will pay off.

On the whole Germany (and most of Continental Europe) has not received as much interest from sovereign investors as the UK or the US… or even Asia for that matter.


Source: Data collected by author. See: What Are GCC funds Buying?, RGE Monitor.

Yet, the Middle East is clearly a growth market for German goods and possibly a capital source too even if the corporate structure may deter. In Forbes, Oliver Drebbing writes that “management of several other large German companies were discussing ways of getting anchor investors, in part to also prevent external financial investors from getting access to technical know-how. At the moment, no German industrial giant such as BASF or BMW has managed to grab a large foreign investor, and most continue to have very a fragmented shareholder structure.”

Europe has been divided on sovereign investors. The UK (and perhaps Switzerland) has been among the most welcoming, while France and Germany have been warier. Perhaps this stems from the economic base of the country. While the UK is increasingly a services based economy and attracting capital is needed, Germans have been wary of foreign acquisitions of the industrial base and some officials even longed for a warchest to fend off unwanted suitors. The EU tried to create a coordinated response to stop member states resorting to actual or perceived protectionism. This culminated in an EU position paper that threw its support behind the IMF’s working group of sovereign funds that is trying to create a code of conduct and share best practices of sovereign wealth management. The EU sought to emphasize though that member states already possessed the ability to protect their national security if not their national industries.

Over the past year many countries, particularly those with less than clear foreign investment regimes have begun reassessing their investment regimes. Australia, Canada, the U.S., France, Germany are among the G10 countries reassessing their rules. Many Emerging markets have done so also. The U.S. has clarified and codified changes in its investment review and lawmakers are taking a closer look at many of the financial oversight and tax policy implications of the regulations. It seems unlikely that any significant tax changes could come to pass before the election – given that there are plenty of tools to block on the grounds of national security.

France has perhaps gone the farthest in Europe – and its law might not quite pass muster with the EU depending on how it is implemented. From Bloomberg: “The French government on Dec. 31 published a decree allowing it to ban foreign investment or takeovers in 11 industries, including computer-network security, casinos and manufacturing of vaccines against bio-terrorist threats.”

Yet some suggest, including the UAE’s central bank governor that barriers abroad, the perception of future barriers (and worries that we may yet to hit bottom) may deter invest
ment – keeping more money at home. While more and more investment is taking place in the MENA region, there are limitations to absorb the capital, especially given global inflationary trends. But sovereign funds may increasingly take their capital to foreign companies that can contribute to domestic economic development – whether it be education, retail, infrastructure or sporting events.

For more on any of this see related past writings including

What Are GCC funds Buying?

GE/Mubadala and a past post

Responses to Sovereign Wealth Funds: Are ‘Draconian’ Measures on the Way?

36 Responses to “German Government and Business Responses to Sovereign Wealth”

richinarSeptember 1st, 2008 at 9:45 am

Looks like I am the FIRST to report that it appears Dr. Roubini has completely lost control of this blog.

Nouriel RoubiniSeptember 1st, 2008 at 10:06 am

I have not lost control of my blog; as i have announced last week i will feature daily – on top of my writings – some other ones among the very best contributions to the RGE group blogs. I expect that this community of readers will enjoy these contributions and actively comments on them. I will continue to regularly blog on an almost daily basis. Happy Labor Day!

GuestSeptember 2nd, 2008 at 9:09 am

10:00 a.m.U.S. Aug. ISM manufacturing index just below 50% consensus10:00 a.m.U.S. Aug. ISM manufacturing index 49.9% vs 50% in Ju

GuestSeptember 2nd, 2008 at 9:12 am

On August 29, 2008, Integrity Bank, Alpharetta, GA was closed by the Georgia Department of Banking and Finance and the Federal Deposit Insurance Corporation (FDIC) was named Receiver

GuestSeptember 2nd, 2008 at 9:26 am

I welcome the appearance of charts and tables on this blog, because it adds a lot of substance to the discussion. However, for the chart above … it would be very helpful if the key to the colors was bigger and more readable. It would also be helpful if the left hand axis was labeled (perhaps the tick marks were lost somehow).You are on the right trend – by adding these graphics.PeteCA

curiousSeptember 2nd, 2008 at 10:28 am

Back to phony economic numbers. I keep reading about our $14 trillion annual economy. Yet, with all of the understated inflation, unemployment, etc. Can someone comment on the possibility that $14 trillion could actually be $9 trillion after imputations and hedonic adjustments? It reminds me of the joke Adam said to Eve, “Stand back, I don’t know how big this thing is going to get.”

GuestSeptember 2nd, 2008 at 11:12 am

Thanks for the Post Rachel.Professor, I would like to see you take up Miss America on his request to explain his Evapor-flation theory he wrote about on 2008-08-08 16:26:31Quote…but what if the debt today is already too big???Simple!You eliminate it. Poof!You shall see. The FASB has already started working this magic. By allowing corporations to write down their debts on level 3 assets, you are seeing the back door to this “disappearing man in the box” routine. (The FASB has allowed this as the counterbalance to writing down their assets on level 3 assets. BUT IT’S NOT!!! …and that’s the beauty.) In much the same way, as these corporations take back auction rate bonds back onto their books, they will also mark up, their write down of overall debt.Eventually, in round robin fashion, you will see the off balance sheet debt being paired off against other counterparty debt to eliminate overall debt. Debt will evaporate. It has already started. It is the only answer for a debt that can’t be paid. Sorta like Chapter 11, it’s a restructuring that’s going on.This, along with many other smaller factors are where I come to my Evapor-flation call!(years from now, you can say you heard it here first)Miss America – gone fishingp.s. If Nouriel provided me a blog, I may better be able to articulate the complete cycle.Written by Miss America on 2008-08-08 16:26:31End Quotehlowe

GuestSeptember 2nd, 2008 at 1:06 pm

2:04 p.m. Three of 12 Fed banks wanted to hike at Aug. meeting: Fed2:04 p.m. Chicago Fed bank joined Dallas, KC in seeking higher rates

GuestSeptember 2nd, 2008 at 1:38 pm

Gee, go figure, more fraud on wall street!Commentary by Joe MysakSept. 2 (Bloomberg) — Why are the bonds priced that way?That’s an unpromising start to a municipal-market mystery,I’ll grant you, but it’s how a new whistleblower intends to makehis case.The whistleblower used to work at a big securities company,and asked that I identify neither him nor the firm. Since latelast year he has been talking to the Internal Revenue Service,the de facto regulator of the municipal market.And this is what he is telling them. Take a look at howthese bonds are priced, he is saying. Why are there coupons of 6percent-plus on bonds due in a year?That’s a pretty good question, because bonds due in a yearor two usually carry the lowest coupons, of 1 percent or 2percent. Issuers don’t normally pay much attention to suchthings, because a bond with a 6 percent-plus coupon is priced at104 or more, bringing the yield down to where it should be.Now we get to the “whistleblower” part, where our manhopes to make his money. How much? Under terms of the law passedin 2006, the IRS pays whistleblowers 15 percent to 30 percent oftaxes, penalties and interest that the agency recovers as aresult of their information. Our whistleblower puts the amount offraud here at about $300 million, meaning his payday would be atleast $45 million.Tax-Rule ViolationThe tax rule being violated, this whistleblower is tellingthe IRS, is 171a, which doesn’t allow buyers to amortize thepremiums paid on tax-exempt bonds. They may amortize the premiumspaid on taxable bonds, but many banks’ accounting softwareapparently didn’t make the distinction.This wasn’t a big deal in the old days, when most investmentbanks didn’t hold lots of tax-exempt bonds, and when most bondswere priced around par.“Banks now hold massive proprietary positions of municipalbonds through their treasury, tender-option bond and arbitragetrading desks,” the whistleblower wrote to the IRS. “Due tomarket conditions and investor preference, nearly all tax-exemptbonds are now issued at a premium, sometimes at a significantpremium.”So what did some big banks do? They gamed the system andaccelerated the whole process, says the whistleblower. They put 6percent-plus coupons on big maturities, $20 million or more, duein a year, bought those bonds at premium prices of 104 or 105,and took millions of dollars in deductions to which the banksweren’t entitled, he claims.The thing about whistleblowers is that they speak in alanguage few people can understand, until you come across someonewho knows exactly what they’re talking about and says, “Uh-oh.”`Yield-Burning’That much was clear when the modern age’s first municipal-market whistleblower, Michael Lissack, told his story to the NewYork Times.Lissack appeared on the front page of the newspaper’sbusiness section on March 3, 1995, describing “yield-burning,”in which underwriting firms routinely overcharged issuers for thesecurities they used in refinancing bond deals.It was all pretty heavy going, once you got into the detailsof the thing, but underwriters eventually paid $205 million tothe government to settle the matter. Lissack was entitled to 25percent of that.The new whistleblower says that market conditions wereperfect from 2001 to 2005, as the Federal Reserve lowered short-term interest rates.High-Coupon Boomlet“Certain firms started aggressively bidding on availableshort-term, high-coupon securities,” he wrote to the IRS. “Thisrepresented a departure from previous practice, as historicallymunicipal bonds with maturities of one year or less were soldexclusively to money-market funds and individuals.“This is because short-term municipal yields are in almostall cases lower than bank-funding costs. Without a tax scheme, itis virtually impossible for banks to make money by buying short-term municipal bonds.”The whistleblower even has a name for the “tax scheme.” Hecalls it “premium-laundering.”Of course, nobody wanted to talk about it, when I called myusual sources, although one underwriter did remember being verycurious about those big coupons.The data show a little boomlet of high-coupon multimillion-dollar maturities due in one year and not reoffered to the publicin 2003 and 2004, and then they disappeared. The whistleblowersays the industry itself put a stop to what it perceived as anabusive practice by a handful of underwriters.The IRS doesn’t comment on its investigations. I did get towhat I would call the “Uh-oh” guy, a money manager whodescribed the subject as “sensitive,” and told me that somepeople had even been fired for it.The only question I have about the story the whistlebloweris telling the IRS is: Did this really happen? I guess the IRSwill find out.(Joe Mysak is a Bloomberg News columnist. The opinionsexpressed are his own.)

GuestSeptember 2nd, 2008 at 1:57 pm

I spoke of grassroots groups of buyers seeking opportunity, profits and cheap low cost low risk assets:“Cash is king,” Peltier said in an interview. “If you’ve got cash available, you have the opportunity to take advantage of some great buying opportunities.” Buffett, no less and Mr Benanke and Paulsen have got it all wrong, er, did I mention, as usual? Expect this to be only one of a myriad of such bottom dredging activities.Ho humPeterJB

AlessandroSeptember 2nd, 2008 at 2:02 pm

So looks like we are headed to an unprecedented oil-crash/stock-down day. As Miss America has pointed out a few weeks ago the commodity/stocks seesaw has broken down. Whoever bought the oil-crash rally must be very confused by now.Miss, you there? How do you feel the force?

NoviceSeptember 2nd, 2008 at 2:38 pm

“The FASB has already started working this magic. By allowing corporations to write down their debts on level 3 assets, you are seeing the back door to this “disappearing man in the box” routine.”The problem is that though the man seems to disappear- it is just an illusion, the man has only exited via the trap door and is waiting in the wings for his reappearance!There is no magic- it is only an illusion- don’t be fooled. Somehow the man- or in this case the big white elephant- will reappear- possibly not where you expect- but reappear it will.

GuestSeptember 2nd, 2008 at 3:14 pm

Debt is a zero-sum game, somebody has to lose money. Those losses will float up in other parts of the economy/globe…

GuestSeptember 2nd, 2008 at 3:20 pm

Construction spending lowest in 7 yearsCommerce Department reports that spending tumbled 0.6% in July, twice as much as expected.cnnmoney September 2, 2008: 10:45 AM EDT

AlessandroSeptember 2nd, 2008 at 3:21 pm

Credit Default Swap explained by John Mauldin:

And here’s the ugly truth. No one knows who is ultimately on the hook for these derivatives. If I sell a credit default swap (CDS) to you and then buy a CDS on the same issue from Joe down the street for a small profit, my “book” looks neutral. And as long as Joe has the capital, I am. But at 12 times the actual underlying debt instruments, there are not just three parties to my mythical transaction, but at least 10. Joe sells to Mary who sells to Bill, etc., etc. Where does the real guarantee ultimately reside?Like the children’s card game, someone is stuck with the Old Maid at the end.If there is a problem, you are going to come to me but I am going to tell you to go to Joe who will tell you to go to Mary and on down the line until someone tells you to go to hell. Then you come back at me and take me to court. That’s the way it works.

The whole article is worth the read.

Miss AmericaSeptember 2nd, 2008 at 4:04 pm

@ Hlowe, Alessandro, and whomever else cares…I have just returned from a 3 week vacation from reality and will spend the next couple of days getting caught up with the world. (It was great! No Internet, No finance, No Economy!!! Just family, friends and fun.)I’ll be working on a grand (Evapor-flation) post… but it may take some time to prep. (as it still requires more observation/hypothisis/prediction/test/re-observe time)Alessandro… I still see the only true upside market winner (long term) being Alt-energy as I stated some time ago. Every ounce of your free financial time should be spent on learning everything you can about this. Just as “tech” was an inevitable wave that rolled in, power and energy will always be needed to fuel that machine. It will only grow, and grow, and grow, and grow, and grow, and grow, and grow, etc…These alternative markets, may become bubbles… but thei substance will stand to be greater. If Obama wins this fall, he’s already promised $150BILLION+ in research/growth in “at home” alt energy products. If the Republican party wins, I believe they will find an eventual parallel commitment to the same. This will be the “ground floor” on this market. (what we have seen in this industry is nothing so far. With that start, private and public investment will likely triple that. (my initial estimates))Miss America (gold medal in blogging… here I come!)

AlessandroSeptember 2nd, 2008 at 4:36 pm

@Miss AmericaI think I see the whole potential of the alternative energy play you suggest, especially once oil crashes for real and alt-energy will probably slip under the radar of the masses for a while. It’s not going to be easy to get the winning long term horses because very much depends on the technical details (exactly as during the dot-com) of companies products and of the business models.I will try to force myself to study the sector in my free financial time, as per your advice… if only I could stop watching the biggest credit collapse in history!

GloomySeptember 2nd, 2008 at 6:00 pm

INEVITABLE CHAOSAs NR says, hundreds of banks are insolvent and are going to go belly up. Yet the FDIC has acted on very few. If 700 banks are to go belly (as NR predicts) over the next 2 years, the FDIC will need to close down about 6 per week. Actually, it will be more like 10 per week as the FDIC is likely procrastinating until after the election and, based on the small number of banks on their “watch” list they are in denial about the reality of the situation. So, when the torrent starts after November, it is likely that the FDiC would need to close something like 10 banks per week. Clearly they won’t be able to handle this kind of volume. So likely we will finally have chaos in the world of finance, and I wouldn’t be surprised to see a bank holiday or two before this sad story plays out. There is no way around this inevitable scenario.

GloomySeptember 2nd, 2008 at 6:06 pm

Major Commodities Fund Closes, In Blow to LehmanOspraie Fund, a big commodities fund partly owned by Lehman Brothers Holdings, is closing down and will return money to investors after incurring big losses this year.People close to the fund, which had nearly $4 billion in assets, said the losses resulted from bad bets in copper and natural gas, causing the flagship fund to lose 38% since the beginning of the year.Read Ospraie’s letter to investorsThe closing of the fund is a big blow to Lehman, whose 20% stake in Ospraie is part of the investment-management business that Lehman is shopping to help raise capital. this is why the market tanked today.

GloomySeptember 2nd, 2008 at 7:11 pm

Nouriel,Following your blog has become much more complicated, as the RGE homepage frequently does not have the most recent post under your name. For, example the post about Japan is currently listed under your name on the RGE home page, even though this post about Germany is the most recent one. Can you fix this problem? Thanks.

PhilTSeptember 2nd, 2008 at 7:58 pm

@ Miss America, Alessandro Alt-EnergyHow will the Alt-Energy markets evolve any differently than the current Energy markets if there is not a comprehensive Energy Strategy derived on Federal, Regional, and local levels preceding the development of said new markets? Same question exists for Transportation which is inextricably linked to energy.Best …

GloomySeptember 2nd, 2008 at 8:34 pm

MORAL HAZARD 101Wouldn’t you just love to hear the conversations between the Koreans and the Fed now regarding Lehman?Koreans: Come on now, you know we are the only bidders left. But won’t you just sweeten the lemonade for us a bit, just like you did for JP Morgan?

GuestSeptember 2nd, 2008 at 11:05 pm

Kalifornia Credit Union goes kaaboomm,Lehman’s next.. LOL

fedwatcherSeptember 3rd, 2008 at 4:07 am

Welcome to the replay of 1932. A world-wide recession coupled with an extreem credit crisis.Expect extreem financial engineering to re-flate in the mist of a normal deflation.Who will win? God only knows, for if Wall Street did, their trilions of derivitives would save them. Hovever, their trillions of derivatives will bury us.There is no ‘safe’ investment. Eliminate personal risk, pay off debts, have cash in hand, and reduce personal liabilities such as too big a house, too big a car, too big any liability.Think 1932 and not 1972!!

GuestSeptember 3rd, 2008 at 10:16 am

Gloomy & Alessandro,MISH just posted that real interest rates are high (and positive).. ie no treasury bubble..Weirdly, i kinda buy this despite the apparent problems with the USA economy..Also, the Austrians is fundamentally against the fractional reserve lending of the current financial system, since it creates money out of thin air.. Also, there is nothing unsound with debt if financed out of savings…So my question is, did the USA banking system create money out of thin air? I am not sure because of securitisation – institutions may have bought the securitised bonds with savings…However, Asians, by pegging their currencies to the USD, definitely have inflated using the fractional reserves lending – making “forced savings” which will be reversed eventually.. This may mean the USD/Treasuries will be stronger than most ppl think…What are your views?..mrskeptical

AfASeptember 3rd, 2008 at 2:24 pm

@ Mr. Skeptical,Probably Mish is correct in his analysis. However, I do not agree with the conclusion. The fact that Real interest (treasury) rates are positive does not mean there is no treasury bubble.Forget about the inflation part, the problem is one of accurate risk computation. The markets are still viewing treasuries as risk-free financial assets. Take mortgages as an example for the period between 2001 and 2006, then between 2007 and now. Mortgage rates during the bubble inflation period were mainly driven by inflation rates. Now, there is a real disconnect between mortgage rates and inflation rates (as Mish argues are down and low) and even Fed rates (supposedly irrelvent). The same story applies to CDS, risk premia …So the question to ask is what kind of risks would probably apprear in the near future (there is no such a thing as “risk free”). In order to project how short and long real interest rates will behave in the future, there are many variables we have to take into consideration, using a scenario analysis (what would impact supply of and demand for treasuries depending on each scenario, the systemic risks, liquidity, arbitrage opportunities, the attractiveness of treasuries relative to other financial instruments and of US relative to other countries … To Be Continued and expanded..)Depending how all this will play out, i.e. when sh!t hits the fan (cf. Gloomy, MA …) whether the vigilantes will wake up, whether the Fed will be forced to dramatically increase or decrease rates, whether the Fed will be forced to monetize some or all of bad debts, whether the great unwinding would accelerate …That, in my opinion what shows Treasuries are in a bubble, when will it explode or whether it will be safely deflated is anyone’s guesstimation.

GloomySeptember 3rd, 2008 at 2:33 pm

@MrSkepticalYes, the fractional reserve system does create money think there is a high probability that, although Treasuries may initially rally in a flight to quality,, they will eventually tank due to supply demand considerations:1. Markedly increased supply due to the very high deficit compounded by 400 biilion to 1 trillion dollars to bail out Fan and Fred (S&P estimate), bailouts of FDIC, too big to fail financials, automakers, airlines, and any corporation with significant CDS exposure which might go under.2. Decreased demand due to decreased foreign central bank purchases (now ongoing at 600 billion dollars per year) due to coming dramatic drop in exports (including oil) with fewer funds available for purchase of treasuries.