TWO years ago, the US Congress pressured the Arab emirate of Dubai to back out of a deal to manage US ports.

Today, governments in the Persian Gulf, China and Singapore have snapped up $US37 billion ($42 billion) of stakes in Wall Street, the bedrock of the US financial system. Politicians and the White House are welcoming the cash and there is hardly a peep from the public.

This is no accident.

The warm reception reflects millions of dollars in lobbying by both overseas governments and their Wall Street targets – aided by Washington veterans from both parties, including big-time Republican fundraiser and lobbyist Wayne Berman.

And the investments have been carefully designed to avoid triggering close US government monitoring.

US financial firms weakened by the credit crisis, including Citigroup and Merrill Lynch, need the cash, and investment pools funded by foreign governments (called sovereign wealth funds) have trillions to invest.

Some US politicians, though suspicious of foreign governments, deem it suicidal to oppose aid to battered financial companies.

“What would the average American say if Citigroup is faced with the choice of 10,000 layoffs or more foreign investments?” asks New York Democratic Senator Charles Schumer, who played a central role in killing the Dubai port deal but has applauded recent foreign investment.

But by making investment by foreign governments seem routine, Washington may be ushering in a fundamental change to the US economy without assessing the longer-term implications.

Some economists say the stakes could provide autocratic governments an important say in how US companies do business, or give them access to sensitive information or technology. Former US Treasury secretary Lawrence Summers counsels caution. “There should be a very strong presumption in favour of allowing willing buyers to take non-controlling stakes in companies. However, it’s imaginable that government-related entities (investing in the US) will be motivated to strengthen their national economies, make political points, reward or punish competitors or suppliers, or extract know-how,” Summers says.

Sovereign wealth funds, meanwhile, continue to seek opportunities.

Last Thursday, at the World Economic Forum in Davos, Switzerland, Qatar’s Prime Minister said the oil-rich sheikdom’s investment arm wanted to invest $US15 billion in European and US banks.

“We’re looking at buying stakes in 10 or 12 blue chip banks,” Sheikh Hamad bin Jassem Al Thani told Zawya Dow Jones. “But we will start small.”

US financial companies are escaping detailed government review by limiting the size of stakes they sell to sovereign funds.

The multi-agency Committee on Foreign Investment in the US, led by the US Treasury, can recommend that the President block foreign acquisitions on national security grounds.

Congress can also block deals by pressuring companies or by passing legislation.

Under CFIUS rules, a passive stake – one in which investors don’t seek to influence a company’s behaviour – is presumed not to pose national security problems.

Neither is a small voting stake, usually of less than 10 per cent.

During the recent deals, financial companies whose investments have met those requirements have notified CFIUS and haven’t had to go through 30-day initial reviews.

When the US economy was riding high in 2004, sovereign money was sometimes shunned.

Dubai’s Istithmar investment fund was viewed warily in New York when it went hunting for real estate.

Now Wall Street is thirsting for new capital, preferably in huge amounts and deliverable at a moment’s notice.

Sovereign wealth funds look like an oasis. These government-funded pools have about $US2.8 trillion in assets, which Morgan Stanley estimates could grow to $US12 trillion by 2015 as Middle Eastern funds bulk up on oil receipts and Asian ones expand from trade surpluses.

“You can’t have a $US9 trillion debt and huge trade deficit and not expect at some point you’ll have to square accounts,” says David Rubenstein, CEO of Washington-based private equity firm Carlyle Group.

Foreign savings have to go somewhere, he says: “Better that they come to the US than anywhere else.” (Abu Dhabi fund, Mubadala Development Corp, has a 7.5 per cent stake in Carlyle.)

As the US financial crisis deepened over the northern summer, sovereign wealth funds became a favourite of capital-short Wall Street firms.

That is because state funds presumably have an incentive to be passive investors, to avoid raising objections to their stakes.

Domestic investors, on the other hand, might demand a bigger say or board seats for a similar stake.

People involved with negotiations say that Merrill Lynch, as it sought its most recent cash infusion of $US6.6 billion, turned away possible investments from US hedge funds in favour of investments from government funds from South Korea and Kuwait.

A senior official at China Investment Corp, which has about $US200 billion in assets, including a $US3 billion stake in private equity firm Blackstone Group, says it doesn’t want to play an active role in corporate governance. “We don’t even want to take the kind of stand of someone like Calpers (the California state pension fund),” the official says. “We don’t have enough people, and we can’t send directors out to watch companies.”

Behind Washington’s acceptance of large-scale foreign investments lies a well-funded lobbying campaign, spurred when Congress objected to the government-owned Dubai Ports World’s investment in a US port operator. The United Arab Emirates was seared by the accusation that an Arab-owned company couldn’t be trusted to protect US ports against terrorists.

Last year the UAE launched a three-year $US15 million Washington lobbying campaign, the US-Emirates Alliance, to polish its reputation.

The alliance, headed by former Hillary Clinton campaign aide Richard Mintz, recruited about two dozen businesses to form a support group. It contributed $US140,000 to a prominent Washington think tank, the Centre for Strategic and International Studies, to start a “Gulf Roundtable” discussion series.

It also forged alliances with prominent Jewish groups by persuading the UAE to clear the way for US travellers whose passports had Israeli visas; such travellers were sometimes turned away by UAE customs agents, Jewish groups say.

Such openness has it limits, though. Last June the Abu Dhabi Investment Authority, the world’s largest sovereign wealth fund, with about $US875 billion in assets, hired public relations firm Burson-Marsteller for $US800,000 for an initial eight-month contract to improve communications. But it still has no press department or press kits.

Even as the Dubai port controversy spurred sovereign investors to engage in a charm offensive, it led lawmakers to re-examine laws governing the Committee on Foreign Investment in the US.

Some proposed to vastly expand the definition of investments that could pose a threat to national security.

Both foreign firms and US banks lobbied fiercely in response, pressing to keep the reviews narrow enough to encourage foreign investment.

Their lobbying largely succeeded. The Financial Services Forum, which represents the 20 largest US financial firms, focused on Senator Schumer, a frequent Wall Street ally.

In one 2006 session, a dozen CEOs, including former Goldman Sachs CEO Henry Paulson, who is now US Treasury Secretary, told the senator about the importance of open investment.

A participant says Schumer described the Dubai port controversy as an “anomaly”. Since then, executives from top financial firms have consulted Schumer when foreign firms have sought to buy stakes and regularly won his endorsement.

Schumer says the executives assure him that foreign investors will have “not just virtually no control, but virtually no influence”.

Compared with the ports industry, the financial sector speaks with an outsize megaphone in Congress. In the 2006 election cycle, commercial banks and securities firms, and their employees, contributed $US96.3 million to congressional campaigns – 32 times as much as the sea transport industry, which includes ports, according to the non-partisan Centre for Responsive Politics.

Banks and securities firms are also the largest industry contributors to members of the Senate Banking Committee and House Financial Services Committee, which can review investments in Wall Street firms. Schumer is a member of the Senate Banking Committee.

Wall Street and the UAE thought they had turned the corner last spring when another Dubai-owned company, Dubai Aerospace Enterprise, bought two firms that owned small US airports and maintenance facilities that serviced some navy transport plane engines.

The Dubai firm pledged to submit to government security reviews and submit its employees for security screening.

It also thoroughly briefed lawmakers on the deal. It ran into no obstacles on Capital Hill.

“I call the strategy, ‘wearing your underwear on the outside’,” says one of Dubai Aerospace’s Washington lobbyists, Joel Johnson, a former Clinton White House communications adviser. “We have to show everybody everything – no secrets, no surprises.”

The deal that provided a blueprint for the current wave of foreign investments was China’s $US3 billion stake in Blackstone Group’s initial public offering, announced last May.

In helping to gain congressional approval for the deal, lobbyist Berman emerged as a key strategist.

Blackstone asked Berman to help smooth the way in Congress for China to buy a piece of the private equity firm.

A minority stake made sense: Blackstone wanted to boost its presence in China. China, which was setting up China Investment Corp, wanted to show it could become a trusted investor in top US firms. Berman said offering a board seat, or a stake above 10 per cent, would invite government review. The two sides agreed on a stake of up to 9.9 per cent and passive investment.

“Policy considerations didn’t drive the specifics of the deal – they informed the deal,” Berman says.

Other deals followed, similarly structured to avoid raising congressional uproar and other sovereign wealth funds have turned to Washington experts for advice.US financial firms say the welcoming attitude of the US Treasury has also helped.

The Treasury and other industrialised nations have subcontracted some of the most difficult questions concerning sovereign wealth funds to the International Monetary Fund.

The IMF is trying to persuade the funds to adopt voluntary codes to act for commercial, rather than political, reasons.

– Additional reporting, Jason Dean in Beijing and Rick Carew in Hong Kong var _hbEC=0,_hbE=new Array;function _hbEvent(a,b){b=_hbE[_hbEC++]=new Object();b._N=a;b._C=0;return b;} var hbx=_hbEvent(“pv”);hbx.vpc=”HBX0200u”;hbx.gn=”ths.news.com.au”; //BEGIN EDITABLE SECTION //CONFIGURATION VARIABLES hbx.acct=”DM561119IFDS”;//ACCOUNT NUMBER(S) hbx.pn=”US+makes+a+U-turn+on+foreign+buyers”;//PAGE NAME(S) hbx.mlc=”/business/wsj/story”;//MULTI-LEVEL CONTENT CATEGORY hbx.pndef=”title”;//DEFAULT PAGE NAME hbx.ctdef=”full”;//DEFAULT CONTENT CATEGORY //OPTIONAL PAGE VARIABLES //ACTION SETTINGS hbx.fv=””;//FORM VALIDATION MINIMUM ELEMENTS OR SUBMIT FUNCTION NAME hbx.lt=”auto”;//LINK TRACKING hbx.dlf=”n”;//DOWNLOAD FILTER hbx.dft=”n”;//DOWNLOAD FILE NAMING hbx.elf=”n”;//EXIT LINK FILTER //CUSTOM VARIABLES hbx.ci=””;//CUSTOMER ID hbx.hc1=”114|Bob+Davis+and+Dennis+KBerman”;//CUSTOM 1 hbx.hc2=”THE+WALL+STREET+JOURNAL-story|January+28+2008+1200am”;//CUSTOM 2 hbx.hc3=”23117816-36375-/business/wsj/story|US+makes+a+U-turn+on+foreign+buyers”;//CUSTOM 3 hbx.hc4=””;//CUSTOM 4 hbx.hrf=””;//CUSTOM REFERRER hbx.pec=””;//ERROR CODES //INSERT CUSTOM EVENTS //END EDITABLE SECTION jserve.write(“/SITE=TAUS/AREA=NEWS.ROS/AAMSZ=1X1/”); ipt>