The Treasury and Congress are still trying to get sovereign funds to agree that their investments in US companies are "financial" and not "political". According to MarketWatch Treasury Undersecretary for International Affairs David McCormick said the government-controlled funds may raise "legitimate national security concerns," and may distort markets if not managed properly

Without a shot being fired in anger, one of the largest funds appears to be willing to go along. Temasek Holdings of Singapore says that it understands the US need to look at national security as it examines whether taking in foreign-based capital is OK.

Temasek’s decision does a lot to undermine the positions of funds from China and the Middle East. Now that one sovereign fund has shown a willingness to go along with US policy, it is harder for the others not to follow. Those who are willing to get under the tent will have a pick of the prizes which include troubled US banks and brokerages.

China and Middle East funds may simply turn their backs on the US investment opportunities. With the economy here slowing, their money might be better invested somewhere else. Putting capital into US financial firms may not be a winning game, even long-term, if the housing market slides well into 2009.

Singapore will not be able to take up all of the slack if other countries find the US policy to restrictive. That means capital to keep troubled US companies and banks afloat will have to come from inside American borders. The problem only has two solutions. The one is for the Fed to open its window for lending to US banks even further. Banks have traded paper, some of it probably not worth much, to the Fed for over $50 billion since December. The Fed may simply take more of the bonds, which may end up as wall paper, and, in essence, become de facto shareholders.

The other option, which may look better in a free market economy, would be for the government to give tax incentives to US private capital for putting up cash for companies in the troubled financial sector. This would have the additional benefit of allowing banks to lend more money because their balance sheets would have a stronger foundation.

Who knows? It might even bring brokerages and money center banks back into the auction-rate market.

That may be asking too much.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.