By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve Tuesday announced its
approval of the application by China’s Sovereign Wealth Fund, the China
Investment Corporation, to acquire indirectly now up to 10% of voting
shares in U.S. banking giant Morgan Stanley.

The Fed’s decision relates to an agreement dating back to the onset
of the subprime mortgage crisis in December 2007, when the CIC,
primarily through a wholly owned nonbank subsidiary, invested $5 billion
in units consisting of trust preferred securities of Morgan Stanley and
a stock purchase agreement to acquire voting common stock of U.S. bank
by August 2010, subject to certain conditions.

On consummation of the proposal, the CIC would own and control up
to 10% of Morgan Stanley’s voting common stock.

The investment came as Morgan Stanley announced
higher-than-expected writedowns of $9.4 billion on subprime and other
mortgage related debt.

China had launched the $200 billion sovereign wealth fund in
September of the same year with a focus on financial products in
overseas markets.

According to details of the Fed’s order that accompanied Tuesday’s
announcement, the agreement provided that the trust preferred securities
would either be remarketed in order to raise the funds necessary for CIC
to purchase Morgan Stanley’s voting common stock or directly redeemed in
exchange for common stock of Morgan Stanley.

The securities were converted directly into voting common stock of
Morgan Stanley August 17, 2010, and the portion of such shares that
would have caused CIC to own more than 4.99 percent of Morgan Stanley’s
voting shares were transferred into a custody account.

“The shares in the custody account will be released on Board
approval of this application and the expiration of the 15-day waiting
period,” the Fed said.

The CIC currently holds, through other subsidiaries, 2.49% of the
voting common stock of Morgan Stanley.

Perhaps with the stir that this announcement might cause among
Washington’s political class, the Fed noted that the CIC has stated that
it does not propose to control or exercise a controlling influence over
Morgan Stanley and that its indirect investment will be a passive

“CIC has committed not to exercise or attempt to exercise a
controlling influence over the management or policies of Morgan Stanley;
not to seek or accept more than one representative on the board of
directors of Morgan Stanley; and not to have any other director,
officer, employee, or agent interlocks with Morgan Stanley,” it said.

** Market News International Washington Bureau: 202-371-2121 **

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