One on One with Robert Hormats, Vice Chairman of Goldman Sachs International
Wednesday, December 19, 2007
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SUSIE GHARIB: Joining us now for more analysis on that big investment today between China and Morgan Stanley, Robert Hormats, vice chairman of Goldman Sachs International. Hi, Bob.
ROBERT HORMATS, VICE CHMN., GOLDMAN SACHS INTERNATIONAL: Hi, Susie, how are you?
GHARIB: Well, besides the news about Morgan Stanley, in recent times, we've seen other sovereign funds investing in Citigroup, in Bear Stearns, in UBS. Is this trend a good development or is it cause for concern?
HORMATS: I don't think it's cause for concern. I think it is just realistic in the current environment that a country that needs capital and the U.S. is indeed a very capital short country because we have a very low savings rate, we have to get it from somewhere. And the Chinese and the Middle East sovereign wealth funds and others have a lot of cash. The savings rates in those countries are very high and those funds are willing and, in fact, eager to invest in American firms of various sorts because they see that the dollar has gone down. They see that the stock values of many of them have gone down. They see these as good opportunities.
GHARIB: Now do you expect that these sovereign funds will be passive investors in companies like Citi and Morgan Stanley or will they take a more active role in determining the corporate direction and the strategies of these firms?
HORMATS: Traditionally they have avoided playing a very active role in the management of these firms. They look at this for the most part over the last several decades and we have a lot of experience with the way these funds work. They look at these kinds of things almost exclusively as financial investments, as ways to earn a profit. Certainly those countries that have large foreign exchange reserves are establishing these funds largely because they want a higher rate of return than they would get on treasury bills. So this is the kind of thing they would invest in.
GHARIB: Bob, can you just say something again, because I lost your audio for a moment.
HORMATS: Can you hear me?
GHARIB: Yes, I hear you now, OK, great. Let me follow up on what you were saying about the Treasury market. To the extent that these funds are investing in American companies and less in terms of Treasuries, what are the implications for the Treasury market?
HORMATS: Well, I think in the near term probably not much because the Fed is going to continue to create liquidity and that has helped to keep interest rates down. But if the market tightens up a little bit and over the median term if they decide to shift money out of fixed income assets and out of Treasuries into equities, it is positive in a long run for equities and negative for Treasuries but not in the short-term because people want Treasuries largely because of the insecurity of the overall investment environment.
GHARIB: For individual investors who may own Morgan Stanley stock or Citi stock or UBS stock and now have these stakes from the sovereign fund, is this a signal to buy more shares or a time to sell?
HORMATS: Well, it is hard for me to make judgments about individual companies. But I do think that you have to look at a lot of these funds as medium term investors. I don't think they are market-timers in the sense that we tend to use it in the U.S. I think they are looking at this as a medium term investment. What I assume is that they see these as good opportunities for returns as they would any kind of company they would buy into. And they probably see that this is a good prospect over the medium term. It is obviously hard to judge one bank against another, one investment versus another but I think in principle, that's the way they tend to look at these as medium term investments.
GHARIB: Real quickly, what kind of response do you think we are going to get from Washington lawmakers about this trend of international investment in American companies, if at all?
HORMATS: I think they ought to be happy about it, in large measure because this, as I said in the outset is a country that is very short on capital. We need to import $3 billion roughly every working day. A lot of American companies need capital. The big suppliers of capital, internationally now are some of these sovereign wealth funds. And to try to cut it all or to interfere with it would deprive American institutions of important amounts of capital. Obviously there may be issues from time to time with specific investments. But in principles they've got capital. They have a high savings rate. We have a low savings rate. We need capital. It is the way the world is today. And they have to come to grips with that, with that reality.
GHARIB: The $3 billion solution. Thank you very much, Bob.
HORMATS: Per day, per day.
GHARIB: Per day, my guest tonight, Robert Hormats, vice chairman of Goldman Sachs International.
