US probe into Bear Stearns China deal
By James Quinn, Wall Street Correspondent
Last Updated: 12:59am BST 23/10/2007
The US Treasury is poised to examine Bear Stearns' $1bn cross-investment with Chinese investment bank Citic in the interests of national security.
The Treasury, through its Committee on Foreign Investments in the United States (CFIUS), will work with several state departments – including Justice, Commerce, State and Defence – to investigate whether the deal raises cause for concern.
It is understood that Bear will have to make appropriate CFIUS filings as part of the regulatory process to have the deal approved. The bank must provide information on the deal and say how it impacts its shareholder base, as well as give specific information on Citic itself.
CFIUS was overhauled in the wake of the Dubai Ports World debacle, when the Middle Eastern port operator had to sell the US assets it bought as part of its takeover of P&O due to a protectionist outcry.
Although banks and financial institutions are not typically deemed to be assets of national security, CFIUS's remit is wide-ranging. It is, for example, looking at Borse Dubai's potential investment in Nasdaq.
More recently, Republican politicians including senator Jon Kyl have asked CFIUS to review Chinese firm Huawei's plans to buy a stake in US technology company 3Com.
Bear's deal with Citic is a landmark step for American-Chinese relations, giving each bank a platform to build their business in the other's continent. The agreement allows each to cross-invest in the other in return for equity. Citic will invest approximately $1bn (£492m) in Bear, receiving securities that will convert into roughly 6pc over time. Citic also gains the right to buy a stake of up to 3.9pc in the open market, taking its eventual holding to no more than 9.9pc.
Bear will invest $1bn in buying Citic's debt in return for a 2pc stake in the Chinese bank. It will also be given options to buy an additional 5pc stake in Citic, exercisable over five years.
The two banks will develop new services and products for the ever-growing Chinese market as well as form a Hong Kong-based company to offer services across Asia. Bear's Asian operations will be merged into the joint venture, as will Citic's Hong Kong-based business.
Bear chief executive Jimmy Cayne, who brokered the deal alongside Bear vice-chairman Donald Tang, will hope the deal deflects from the bank's recent troubles. In the last few months, it has closed down two hedge funds amid $6bn of losses and reported dismal third-quarter profits.
However critics suggest that the amount invested by Citic is not as much as the market had hoped for – following reports that Bear could sell up to a 20pc stake – and gives it less capital than expected to weather the sub-prime meltdown.
Bear had not returned calls made at the time of going to press. Inquiries to CFIUS were passed to the US Treasury, which declined to comment.
Securities? Sure, throw some toxic CDO's into the swap while they're dumping BS garbage on the Chinese?