Sovereign wealth funds strike again

Morgan Stanley becomes the latest financial firm to score an investment from the new power players in global finance.

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By David Ellis and Grace Wong, staff writer

NEW YORK ( -- Wall Street bank Morgan Stanley said Wednesday it received a $5 billion injection from China's state-run investment arm, becoming the latest financial firm to look overseas for cash.

Morgan Stanley (MS, Fortune 500), addled by bad bets on risky home loans, joins the ranks of Citigroup, UBS and Bear Stearns, which all have received infusions from foreign players in recent months.

Sovereign wealth funds, which act as a country's investment arm, have long been investing money gained through exports or from the sale of commodities such as oil. But the credit crisis, which has left several financial strapped for cash, has created even more opportunities for these funds.

The investment by China Investment Corp., which took a stake in private equity titan Blackstone Group (BX) in May, comes on the heels of the $7.5 billion cash infusion Citigroup (C, Fortune 500) received from Abu Dhabi's state investment fund last month.

Earlier this month, Swiss bank UBS (UBS) said it received an $11.5 billion investment from Singapore's investment arm and an investor in the Middle East. In October, Bear Stearns Co. (BSC, Fortune 500) and Chinese investment bank Citic Securities Co. said they would each invest $1 billion in the other.

Morgan Stanley said China's sovereign wealth fund would take a less than 10 percent stake in the company, and that the investment would bolster the firm's capital position and growth opportunities abroad.

"We are delighted to welcome CIC as a long-term investor in Morgan Stanley, and believe it is an important step in increasing the flow of capital between our countries and across these increasingly critical markets," Morgan CEO John Mack said in a statement.

Located both in the oil-rich Middle East, as well as other nations such as Russia and Singapore, sovereign wealth funds are expected to wield even more might in the coming years. Combined assets under management are expected in the next three years to quadruple to $7.9 trillion from $1.9 trillion, according to Merrill Lynch.

While government debt like U.S. Treasuries have long been their investment vehicle of choice, the funds' appetites have grown more complex as they have searched for greater returns, said Jay Bryson, global economist at Wachovia Corp.

"There are only so many Treasury securities or government bonds out there they can buy, so they are looking to diversify," said Bryson.

Economists argue that investments by sovereign funds are important to the U.S. economy, providing capital to firms and supporting the dollar. At the same time, the funds have have faced plenty of criticism.

World leaders have worried that the funds may try to wield their investments as a diplomatic tool and called for greater transparency about investments.

Lawmakers in Washington have been equally cautious, despite a recent push by both the White House and some members of Congress to court foreign investors after last year's widely-publicized failure of Dubai Ports World to manage six U.S. ports.

Going forward, sovereign wealth funds will most likely try to avoid scrutiny altogether by acquiring small stakes and forgoing management control, said Edwin Truman, senior fellow at the Peterson Institute for International Economics.

"Sovereign wealth funds have learned from their experiences," said Truman.

This is an updated version of a story that ran on on Nov. 27. To top of page

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