Jan. 4 (Bloomberg) -- Sovereign wealth funds have been buying up stakes in troubled U.S. and European money-center banks, brokers and other financial institutions at such a rapid pace that you have to wonder: Do they know something other investors don't or are they just spending too much, too fast?

A few months ago, these funds were regarded as the bogeymen of global finance, intent on using their affluence to acquire strategic industries in the West. By year's end, they were its Santa Claus.

In the past two years, sovereign wealth funds and Chinese financial institutions invested at least $77.2 billion in Western banks and money managers. About $66.6 billion of that was placed in the last three quarters of 2007, accelerated by banks' needs for capital infusions after being battered by the subprime- mortgage crisis and related credit crunch.

The bigger deals include Government of Singapore Investment Corp.'s $9.7 billion investment in Switzerland's UBS AG, and Singapore-based Temasek Holdings Pte.'s 18 percent stake in Britain's Standard Chartered Plc for $9.2 billion. The Abu Dhabi Investment Authority paid $7.5 billion for a 4.9 percent holding in Citigroup Inc., while Temasek invested $4.4 billion in Merrill Lynch & Co. with an option to buy an additional $600 million of stock. China Investment Corp. bought $5 billion of Morgan Stanley.

With more than $2.5 trillion in capital, ``not too long ago, these new masters of the universe were more feared than favored,'' says Joseph Quinlan, New York-based chief market strategist at Bank of America Capital Management. By providing badly needed capital to banks and other financial institutions, ``sovereign wealth funds emerged as a source of financial stability rather than instability.''

`Complicated Messes'

Maybe so. But these giant piggy banks aren't charitable institutions.

``We don't know why anyone would want some of these financial institutions, as their franchises aren't worth much; and they have big, complicated messes that won't be fun to try to unravel,'' Ray Dalio, Westport, Connecticut-based president of Bridgewater Associates Inc. with $150 billion under management, said in a late November report.

Many banks make money playing the gap in prices, or spreads, between different securities, currencies and interest rates. These strategies, however, can be replicated without banks' large, expensive overheads. ``We are all competing to create the most efficient portfolios to make our spreads over our cost of funds,'' Dalio said. ``Why would you want a bank as your platform, especially when the quality of portfolio managers working there are those who built the portfolios that yielded these results?''

Bank Managements

The managements of these banks and brokers are nothing to cheer about. Just look at their losses. And by taking minority stakes, opting not to sit on boards and surrendering voting rights -- as they have in several instances -- the funds are betting on the same folks responsible for the red ink.

Bottom line: ``Owning a big American bank is a bit like owning a big American automobile company, or a big American newspaper, or, for that matter, the U.S. dollar,'' Dalio said. ``For all of them, the memory of what it was carries a certain cache that tends to make it trade for more than its real value in the modern world.''

Perhaps the most telling evidence that sovereign funds may be buying pigs in a poke is billionaire Warren Buffett's rebuff to U.S. financial institutions seeking cash infusions. ``So far, we have not seen a deal that causes me to start salivating,'' the chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. said in a Dec. 26 interview on CNBC. Of course, Buffett isn't averse to all banks. Berkshire Hathaway is the biggest shareholder in Wells Fargo & Co. and the second-largest in M&T Bank Corp.

Insurer Ratings

Two days later, the company said it was buying the reinsurance unit of Holland's ING Groep NV and setting up a company to guarantee municipal debt in competition with existing bond insurers struggling to retain their AAA credit ratings.

Sovereign-fund investments have focused on Western financial institutions with large presences in emerging-market economies, strong securities businesses and modern asset-management capabilities, according to Huw van Steenis, head of banking and diversified-financials research for Morgan Stanley in London. Much of the investment is predicated on expectations of growing middle-class wealth, especially in Asia.

Initially, the investments look smart. The stocks are mostly very liquid and cheap. Furthermore, the shares are often sold at large discounts. Temasek purchased Merrill Lynch stock at a 12 percent discount to its share price a week before the investment was announced.

Unknown Losses

Unlike most private-sector fund managers, sovereign funds can also afford to be long-term investors. And being government entities, they aren't required to constantly mark their investments to market.

Even so, the stocks aren't cheap relative to the financial sector's long-term valuation multiples, Dalio said. What's more, Bridgewater says the full extent of bank losses isn't known. ``We also believe that the credit problems that lie beneath the surface are much larger and more threatening than the ones that have surfaced,'' the firm said in a Nov. 21 report.

When a crisis hits, it's almost reflexive for financial institutions to understate losses and postpone acknowledging them.

Nonetheless, ``2008 will likely present the best buying opportunity for high-quality financials in the last decade,'' Lehman Brothers Holdings Inc. said in a Dec. 7 report.

Three problems: One, figuring out which ones are high quality. Two, in July, Lehman was wrong when it said the worst of the global credit-market rout was over. Three, Dec. 7 isn't a very lucky date in American history.

(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Michael R. Sesit in Paris at at msesit@bloomberg.net

Last Updated: January 3, 2008 19:02 EST