by Gillian Tett
FINANCIAL TIMES

Pub­lished: Feb­ru­ary 7 2008 19:21 | Last updated: Feb­ru­ary 7 2008 19:21

Ear­lier this week, I chat­ted with a jet-lagged senior US financier. Like many of his ilk, he is flit­ting around the Mid­dle East and Asia try­ing to extract finance from sov­er­eign wealth funds and other invest­ment groups.

His lat­est trav­els have deliv­ered a sur­prise: some funds are qui­etly get­ting cold feet about the idea of putting more cap­i­tal directly into west­ern banks, he says.

“There is a back­lash build­ing,” he mut­tered into a crack­ling cell phone.

This is strik­ing stuff. In recent months, many equity investors have taken com­fort from the idea that sov­er­eign wealth funds could ride to the res­cue of Wall Street, if not the City of Lon­don too.

For as the sub­prime scourge has spread, US pol­i­cy­mak­ers have leant on the largest US banks to raise cap­i­tal, almost at any cost. Con­se­quently, they have passed the beg­ging bowl around the sov­er­eign wealth funds, with con­sid­er­able suc­cess. Thus far some $40bn to 60bn worth of injec­tions have been promised to groups such as Mer­rill Lynch and Citi, depend­ing on how you mea­sure the promises.

But hav­ing stepped into the breach so vis­i­bly late last year, some funds are now get­ting jit­ters. In China, for exam­ple, there are ris­ing com­plaints that funds are fool­ish to shovel cash directly into risk-laden US banks when they could be using it in bet­ter ways, such as pur­chas­ing west­ern com­mod­ity or man­u­fac­tur­ing groups.

“The Chi­nese are wor­ried they are turn­ing into [the source of] dumb money,” says one well-placed Asian financier, who partly blames the trend on the Black­stone saga, which pro­duced sig­nif­i­cant paper losses for the Chi­nese investors.

Mean­while, in the Mid­dle East, the lat­est round of Fed­eral Reserve inter­est rate cuts has cre­ated unease. For sure, some pow­er­ful Gulf investors have been heart­ened to see that the US author­i­ties are act­ing in a res­olute way. They are dou­bly relieved that the dol­lar has held up so well so far. But the dra­matic scale of Fed cuts has prompted con­cern that Wall Street is still sit­ting on a putrid mess – con­trary to what the US banks told the sov­er­eign wealth funds late last year.

Unsur­pris­ingly, this leaves Gulf investors cyn­i­cal about promises from Wall Street banks. It also has some Asian and Gulf funds con­clud­ing that if they are going to invest to take advan­tage of the sub­prime mess, they are fool­ish to do so directly or alone. Hence some are now turn­ing to pri­vate equity funds such as JC Flow­ers which are at least trained to analyse the sub­prime mess.

Now, it would be nice to think this sen­ti­ment shift does not mat­ter too much for the US banks. After all, the recent infu­sion of funds means the largest Wall Street groups are look­ing pretty well cap­i­talised on paper. It also means they should be able to absorb sub­prime losses, which banks such as Gold­man Sachs think could reach $200bn for the banks soon.

How­ever, the prob­lem is that sub­prime is just one of sev­eral poten­tial loom­ing shocks. Defaults on other forms of con­sumer debt and com­mer­cial prop­erty could rise this year. So could defaults on cor­po­rate lever­aged loans from 2009 on.

Mean­while, the mono­lines insur­ers are threat­en­ing to blast another hole in banks’ bal­ance sheets. Indeed, if you tot up all the hits that could emerge in the next cou­ple of years, it is easy to reach a sum of $500bn, or far more. This is size­able, given that Gold­man Sachs cal­cu­lates that the banks’ cap­i­tal is around $1,600bn.

I would bet that in the com­ing weeks large west­ern banks will once again start pass­ing the beg­ging bowl around the Mid­dle East and Asia. But I would also bet that these banks will find the going increas­ingly tough.

Yes, US polit­i­cal pres­sure might pro­duce a bit more money for banks. The Gulf and Asia remain flush with cash. But if the sov­er­eign wealth fund money is now flow­ing to pri­vate equity funds instead of west­ern banks, this gives this tale a whole new twist.

Stand by to see a new chap­ter unfold in this finan­cial crunch.