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Aug 31, 2010

Fed approves CIC stake in Morgan Stanley

State-owned Chinese fund allowed to control up to 10 percent of US bank’s common stock

The US Federal Reserve Board has approved China Investment Corporation’s (CIC) bid to acquire up to 10 percent of the voting rights in Morgan Stanley.

In a statement released late on Tuesday, the Board said CIC had given it assurances the state-owned investment fund would not try to take control of the US bank.

‘CIC has committed not to exercise or attempt to exercise a controlling influence over the management or policies of Morgan Stanley,’ read the statement.

The sovereign wealth fund also agreed to a number of other conditions, called ‘passivity commitments’. These include the agreement that it will not seek or accept more than one representative on Morgan Stanley’s board.

The regulator approved the purchase on the grounds that it would not damage competition in the US banking market.

‘Based on all the facts of record, the Board has concluded that consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of banking resources in any relevant banking market,’ it wrote.

CIC is taking control of the common stock under an agreement it reached with Morgan Stanley in 2007, said the Board. The Chinese fund currently owns 2.5 percent of Morgan Stanley, the Board added.

The agreement dates back to the subprime mortgage crisis, when Morgan Stanley was experiencing massive write-downs and needed to recapitalize.

It did this by selling a 9.9 percent stake to CIC in securities with no voting rights that would convert into common stock in August of this year. At the time, the stake cost CIC $5 bn.

CIC is the world’s fifth largest state-controlled investment fund, with around $332 bn in assets under management, according to the Sovereign Wealth Fund Institute. It was set up by the Chinese government in 2007 to invest the country’s foreign currency reserves.