The Phantom Flight

The story rattled bankers and diplomats around the world. Saudi investors, angry over the way their U.S. accounts had become targets of investigation since 9-11, were pulling billions of dollars out of America. By one account, which hit the front page of the Financial Times last month, the Saudis had withdrawn as much as $200 billion from U.S. markets since late spring. The story got picked up and repeated all over the world, panicking bourses, causing the dollar to fall against the euro and fueling speculation of a widening rift between Washington and the House of Saud.

The reaction to the story, though, doesn't make it true. In fact, the Saudis have moved some money out of the United States, as have investors from most places, including Americans. But the figure is in all likelihood nowhere near $200 billion. That sum was first cited by Council on Foreign Relations senior fellow Youssef Ibrahim, who told NEWSWEEK that he tallied the numbers from private conversations with London bankers. He also said he was unaware that the U.S. Treasury data on foreign portfolio flows include a category, "Other Asian," which is predominantly made up of Saudi funds. Between April and June, less than $1 billion in "Other Asian" funds fled the U.S. stock and bond markets.

The Treasury figures aren't perfectly accurate, by any means. The London consulting firm 4Cast pointed out in a recent report on the Saudi-money issue that investors could sell U.S. assets through a bank in, say, Geneva or London, and the sales would be attributed to the Swiss or the British, rather than the Saudis. Because of this, the Treasury data probably underestimate total Arab assets in the United States, as well as any outflows. Still, 4Cast director of research Alan Ruskin, along with other analysts in both Europe and America, believe that the Treasury data provide a realistic outline of actual money flows. "If it's happened, it's been modest," he says. Market watcher Jim Bianco, president of Bianco Research in Chicago, concurs. "The $200 billion figure sounds made up to me."

It's likely the story sounded believable to many investors because of the war tension and gloom hanging over American markets. This is hardly the first time "blame the outsider" rumors have roiled global markets in times of stress. Back in the 1960s, former U.K. prime minister Harold Wilson attacked "the gnomes of Zurich" for deflating what, in retrospect, was a clearly overvalued pound. At the height of the Asian financial crisis in 1998, Malaysian Prime Minister Mahathir Mohamad blamed "evil" foreign speculators for abandoning the region, even when rich locals were fleeing even faster, and for good reason. Underlying instability in local markets, massive debt and crony capitalism were at the root of the crisis, not hedge funds. "I think that there is an overall 'blame' culture that exists, which is simply easier to get away with if you target outsiders," says UBS Warburg currency analyst Shahab Jalinoos.

--Saudi investors could not be blamed for being leery of U.S. investments. Everyone in the financial world knows that most of the 9-11 hijackers were Saudis, and that American antiterror investigators are "profiling" Arabs and tracking their money flows for links to Al Qaeda. In August, South Carolina lawyer Ronald Motley filed a $3 trillion lawsuit on behalf of the 9-11 victims, accusing key Arab banks and royals of supporting terror. The Patriot Act, which requires U.S. banks to conduct enhanced scrutiny of suspect bank accounts, came into effect last July. Since then, says Richard Payro of the Swiss Banque Syz, "many people in the gulf region have felt they were treated as suspects." Payro and other bankers claim that some Arabs are moving money from the United States to Europe to avoid such scrutiny.

Still, it's hard to move as much as $200 billion in a short time without leaving some obvious traces. Ibrahim believes that the Saudi pullout would have really heated up in July and August, after the announcement of the terror lawsuit and calls from some quarters for the freezing of Saudi assets. "But, had there been a massive Saudi money pullout in June, July or August, you would have expected the euro-dollar exchange rate to move, and it didn't," says Jalinoos. This is a sentiment echoed by one of the Arab world's wealthiest investors, Saudi Prince Alwaleed Bin Talal. Earlier this month the prince issued a press release citing eight reasons why reports of a Saudi pullout were false. First among them was the notion that "withdrawing $200 billion within a period of two months could not have taken place without a major financial disruption in the U.S., regardless of whether the transfers were of liquidated stocks, bonds, or even time deposits."

The problem for the U.S. stock markets is more a loss of confidence than jittery Saudis. Since early this year, a broad range of investors worried about corporate scandals and an economic slowdown in the United States have been looking to move at least some of their money to Europe. "The dollar is weak, and interest rates in Europe are higher, so it would be completely normal investment behavior to diversify out of the U.S. right now," notes Ruskin. Any Saudi investors who did pull out over the summer were likely motivated at least as much by prosaic financial considerations as by fear of the American hunt for Arab terror suspects.

In fact, there is some evidence that the Saudis may be bolstering the U.S. economy. According to Ruskin, offshore hedge funds (reputedly a popular place for Saudi assets) have not been dumping U.S. assets en masse; rather, a number of Caribbean-based hedge funds have been buying back into the U.S. market. Atif Abdulmalik, CEO of the First Islamic Investment Bank of Bahrain (which runs a U.S.-based Islamic banking arm), recently told NEWSWEEK that his group plans to put more money into the U.S. market in the second half of 2002 than it did in the first. Robert White, president of Real Capital Analytics, a New York-based firm that tracks commercial-real-estate sales, says Saudis and other Middle Eastern investors have been net buyers this year. Jim Fetgatter, chief executive of the Association of Foreign Investors in U.S. Real Estate, says, "It seems to me that at least some Arab investors are becoming more enthusiastic about the U.S. markets, rather than less so."

So for the moment, it looks like the phantom flight of the Saudi billions will take its place in the annals of big, bogus global-market rumors. Of course, there are still some looking for proof of such a pullout, and believe that July Treasury data (due out at the end of the month) will prove them right. But even if the data do show that "Other Asians" are withdrawing more funds than before, it's still highly unlikely the number will reach nine figures, and it'll be impossible to sort out exactly why. Americans themselves pulled out more than $50 billion from equity funds that month. If Saudis also decided that July was the time to diversify, nobody could fairly question them for abandoning U.S. markets at a moment of uncertainty and crisis.