Tuesday, June 28, 2011

Main Street for Sale: How Banks Are Selling US Public Landmarks to Foreigners

Foreign governments and businesses are buying more and more public U.S. assets such as schools, airports and even parking lots, and U.S. banks such as Goldman Sachs are only happy to help them.

On Wall Street, running these so-called Infrastructure Funds that buy such assets are big banks with over $140 billion, including Goldman Sachs, Morgan Stanley and Australian infrastructure specialist Macquarie, according to research compiled by the Huffington Post and MSNBC.

"Goldman says it will be involved with 'ownership and operation of public services, such as airports, toll roads and shipping ports, as well as power generation facilities, physical commodities and other commodities infrastructure components, both within and outside the United States,'" the Huffington Post reports.

Why buy a slice of American life?

Because it's a good investment with little competition.

"Most assets are monopolistic in nature and have limited competitors, creating the opportunity for stable, long-term investment returns. Investment choices include economic assets and social assets," says Quadrant Real Estate Advisors, real estate fund manager with assets in the U.S. and Australia.

The market size of such assets runs between $12 trillion to $20 trillion, about the same size of the American mortgage market.

"Given the market and potential return opportunities, institutional investors should consider infrastructure a strategic investment allocation," Quadrant concludes.

While not new globally, privatization is a fairly recent trend in the United States.

Some Republicans like it because it pumps local governments with sales revenue and lets them move head acting fiscally responsible.

Democrats like it for the same reason and for the injection of investment capital that comes with it, as evidenced by the Obama Administration's encouragement of Chinese sovereign wealth funds to invest in American infrastructure and former Democratic Chicago Mayor Richard Daley's privatization of Chicago's Midway Airport, Chicago's Skyway road, and Chicago's Parking Meters.

Ratings agencies, meanwhile, have rewarded cities and towns that privatize assets.

Cash-strapped cities, states and towns have worried municipal bond investors, especially after star Wall Street analyst Meredith Whitney told "60 Minutes" last December that widespread defaults in the sector were likely, threatening to climb into the hundreds of billions of dollars.

That hasn't happened up to now, although Whitney is sticking to her guns and pointing out that when federal stimulus programs end and all that money flowing into state and local governments dries up with it, defaults will rack up.
"It's going to be big," she tells CNBC.

"What was troublesome is people took (the call) that it would have to be this year. I never said that. But that's the size we're looking at."

"We are in our fourth consecutive year of over $100 billion in state budget gaps. This month, the federal stimulus money runs out. The federal stimulus money — over $480 billion — went to states and it has padded budget gaps by 37 percent," says Whitney, CEO of the Meredith Whitney Advisory Group in New York.

Add to that, the level of unfunded liabilities such as pension obligations is on the rise, Whitney says.

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