It's hard to remain xenophobic when you don't have a choice

I remember the xenophobic outcry when the Japanese company Cosmo bought the famed Pebble Beach golf course and related properties in 1990 at a time when Japan was flush with money and buying (and ultimately overpaying for) multiple trophy properties in the U.S. People worried that foreign interests would soon own much of the country's real property, the consequences of which were partly felt when the Dubai Ports World attempt to take over six U.S. ports was scuttled out of national security interests in March 2006.

But it seems that the promise of opportunity and/or financial need can easily trump those concerns, starting with the oddly non-controversial (at least in the mainstream media) purchase of John Laing Homes by the Dubai-based Emaar just three months later (although it seems the controversy was kept alive by numerous bloggers).

More recently, on the heels of giant write-downs for the likes of Citigroup and Merrill Lynch (which is reporting a $15 billion loss), up to $29 billion has been invested in U.S.-based financial institutions from various Sovereign Wealth Funds based mostly in Asia and the Middle East.

Of course this is raising some national security concerns as well as reviving distrust of investors who may not necessarily have the best interests of U.S. citizens in mind (although the same has often been said for Wall Street, hedge funds and private equity money). According to a very good and detailed story in the Wall Street Journal:

The new investments are sure to complicate the so-far successful efforts of Wall Street firms to keep these purchases below the Washington radar screen. Multiple investments from government funds will get closer scrutiny from regulators for signs the funds could work together and exercise control. Any questions will lengthen the time regulators need to review the deals. And federal lawmakers, who've given the string of government investments a pass, will take another look in this election year.

"The goal is to get a [page] B6 story in the Wall Street Journal and have no one mention it," said a Washington lobbyist who has shepherded a number of foreign-government investments in Wall Street through Congress.

And yet such moves may help keep the credit crunch more focused on Wall Street:

Their grousing is offset in part by a salubrious effect on the larger economy: It's better for capital-short banks to raise money from investors than to sell assets and cut back on lending -- thereby spreading the credit crunch from Wall Street to Main Street.

Still, due to various banking regulations that kick in, such deals can get risky:

For example, deals that leave a single investor owning 5% or more of a bank's shares can trigger regulatory scrutiny under the Bank Holding Company Act. While the Federal Reserve in the past has permitted some transactions that exceed that 5% threshold, the Fed also could subject the investor to periodic examinations or require it to maintain certain capital levels. Major funds are loath to open their books to regulators, and tying up their capital to meet regulatory requirements would prevent them from deploying it in more lucrative fashion. (The issue doesn't arise with Temasek's Merrill investment because Merrill isn't a commercial bank.)

For stakes of more than 10%, or if the outside investor would be represented on the bank's board, the regulatory hurdles become even more cumbersome. The Fed, along with the Treasury Department, also can investigate whether the investors planned to exercise coordinated control of the company.

As a result, financial institutions -- including Citigroup in its Abu Dhabi deal -- have taken pains to avoid the different regulatory thresholds that would attract more scrutiny.