Asia eyeing up corporate America

The Chinese government's decision to pump $5 billion into Morgan Stanley is the latest sign of the growing interest by foreign investors in US financial companies that have been battered by the subprime mortgage crisis.

For its money, China Investment Corp will earn nine per cent a year on its investment until it converts in 2010 into as much as 9.9 per cent of Morgan Stanley's common shares, making the so-called sov-ereign wealth fund the second-largest shareholder in Wall Street's No. 2 investment bank.

The move follows similar investments by the Chin-ese in Bear Stearns Cos in October and by Abu Dhabi in Citigroup Inc last month. In May, China Investment acquired a stake in Blackstone Group as the private equity giant went public.

The cash from abroad has come as financial companies have struggled to cope with massive losses on their mortgage-related holdings.

Morgan Stanley has reported the first quarterly net loss in its 73-year history after incurring $9.4 billion in losses tied to mortgage securities, almost triple what the company foreshadowed in November.

Good sign

Treasury Secretary Henry M. Paulson Jr. said that it was a good sign that major US financial companies were raising fresh capital after being pummelled by mortgage-related losses.

"Our institutions came into this well-capitalised and it's important that they stay that way," he said in an interview with Los Angeles Times reporters and editors in Los Angeles.

Paulson wouldn't comment directly on China's recent Wall Street dealings, but said: "Foreign investment is the ultimate vote of confidence in our economy."

Investors apparently agreed. Morgan Stanley's stock jumped 4.2 per cent on the news, adding $2.01 to $50.08.

Not everyone was so positive. Senator Christopher Dodd, chairman of the Senate Banking Committee, said that he wanted "to know more about the specifics of this deal", including whether it needs to be reviewed by federal regulators.

One analyst said the infusions from abroad were an indicator of America's eroding position in global capital markets. "What you're seeing is a shift in financial power away from the United States to China and the Middle East," said Richard X. Bove, an analyst at Punk Ziegel & Co, "and that is not good for the US economy."

Among other things, Bove said, loss of financial clout by Wall Street could put US companies at a disadvantage when competing for funding with foreign rivals.

Morgan Stanley's fiscal fourth-quarter loss of $3.59 billion, or $3.61 a share, was much worse than the 39-cent-a-share loss estimated on average by Wall Street analysts.

In the fourth quarter of 2006, Morgan Stanley reported a profit of $2.27 billion, or $1.44 a share.

Disappointing results

CEO John Mack called the results "disappointing". The company said it was reorganising its trading operations to better manage and monitor risk. "It's clear that there is something very wrong in the management structure of this company," Bove said.

US and foreign investment firms have racked up tens of billions of dollars in losses in recent months as increasing numbers of subprime borrowers have defaulted on their loans, rocking the housing industry and causing a credit crunch that is threatening the health of the US economy.

It has also cost several Wall Street executives their jobs, most notably the CEOs of Citigroup and Merrill Lynch & Co. Mack, who pushed Morgan Stanley into mortgage lending during the past year, said on Wednesday he would forgo his annual bonus, which was $40 million last year.

Crisis management

Although Morgan Stanley and other companies have been aggressively marking down the value of mortgage-related securities on their books, analysts said the subprime crisis isn't over.

"I don't think we're seeing the light at the end of tunnel," said Matthew Albrecht, an equity analyst with Standard & Poor's in New York.

"I think there is more to come in the first two quarters of 2008. If it will be as severe as it's been is hard to tell."