December 08, 2007
Citigroup: "Arab" Capital, Need and Fear
With the good apparent news that , as FT commentator Ferguson put it, World War IV is off as the warmongering Right Bolshies in America have had their arguments castrated, and a moment on the weekend, I think it useful to take an economy moment to reflex slightly on on Citigroup's rescue by the Abu Dhabi Investment Authority (ADIA) and the effective non-reaction of the usual suspects such as congenital cretin Mr Schumer. Now, the non-reaction somewhat wrong-foots my own commentary two months ago anticipating great hysteria, but perhaps the promise to be "silent" as an FT arty put it placated the professional cretin. Or perhaps rather his handlers in NY understood Citi's shaky state and shaped the reaction, so very different than either his reaction to the investment proposed in Nasdaq or last year (2006) with Dubai Ports World (also at the opening for more explicit Schumerism).
The contrast between in particular the round up of reaction in the Schumerism link and the non-reaction to Citigroup is interesting. Fear of banking collapse and grinding halt to the queer American use of houses as credit cards perhaps partial driving explanations on the political side, but my speciality is not American politics, which I care little about except where it has MENA blow back. Unfortunately given a near decade of utter cretinism on the Americans part in this respect, this is too frequent.
A few preliminaries, on the technical side, the ADIA offer was near perfect for Citi, as the linked Lex column notes:
Raising new capital is never going to be pleasant when your stock has been pummelled. And when there is the extra sticker shock of an 11 per cent coupon – as the new equity units will pay – it is a reminder of how much of a mess Citi finds itself in. Still, it has tried to minimise the pain by issuing a kind of security that benefits both from tax deductibility on the interest payment and presents less earnings dilution to existing shareholders than if it had used plain vanilla equity. The yield does not look so eye-popping once it is adjusted for tax and the fact that the new investors will not get all the benefit of a rising Citi share price. Essentially, it is the sort of structure that fits Citi’s needs. It could do with the capital now but does not want to raise it at today’s share price.
Another item to retain is the "silent" position rather matches, eerily as FT put it, Prince Waleed's positioning a decade or so ago in taking a position in Citi. Formal control set aside, but being a reference shareholder gives one a voice, de sotto in times of crisis. Of course, the fear mongering xenophobes fearful of "Arab capital" investments did indeed notice (although Schumer chose to stay silent):
Mr Bayh said the alleged role played by Saudi Arabian Prince Alwaleed bin Talal, who holds a 4 per cent stake in Citibank, in the resignation of former chief executive Chuck Prince, showed that even minority investors could influence "significant" developments at a company
What remains unfortunate is that the xenophobes in question come from the Left and will probably gain power in the next American elections. Anti-Market xenophobia is probably more harmful to investment interests, but on the other hand, the Right Bolshies have already done so much harm that some small degree of cretinism from the Left for a brief period, presuming they do not send America into a spiral of protectionism but merely stall expansion of free trade, should be acceptable at least from a global perspective.
I rather take the view expressed by FT's Gapper last week: that "America should be thankful for canny Arab wealth", insofar, as Gapper put it "Meanwhile, the money spent on energy by US consumers and businesses is flowing back into the country in the form of capital at a time when it is urgently required." Or in short, others are saving for Americans own spend-thrift benefit.
But it seems worthwhile to quote Gapper in extenso on this point:
Here, on the Gulf coast, is the spot where the world’s wealth is most concentrated. Abu Dhabi, the biggest of the United Arab Emirates, has nine per cent of the world’s oil reserves and four per cent of its natural gas. The Abu Dhabi Investment Authority (ADIA) is thought to have $1,000bn (€677bn) in funds thanks to $90 oil, with billions more pouring in every month. .... As other investors lost their nerve this week, Abu Dhabi injected $7.5bn into Citigroup in return for bonds convertible into a 4.9 per cent equity stake.
It helps to be separated from Wall Street just at the moment. We have reached the point in the cycle where fear has definitively taken over from greed. Bad news about the US consumer or the housing market, which increases the risk of a recession, is seized on anxiously. Good news, such as last week’s buoyant Black Friday sales figures, is explained away gloomily.
In Abu Dhabi, that noise is less intrusive. The ADIA took the view that a bank with an unmatched global franchise, trading at 1.4 times book value, with a dividend yield of about 7 per cent, was either on the point of cutting its dividend and breaking apart, or was a bargain.
Perhaps it is that Abu Dhabi has a lot of cash, which it has to invest somewhere. The SWFs are taking over from private equity and mutual funds as the place for companies to go when they seek large slugs of risk capital. Investors in the Gulf states hold between $1,600bn and $2,000bn of foreign financial assets, according to a McKinsey study, and are no longer content docilely to buy bonds.
Given this, it makes sense to buy stakes in western banks such as Citigroup and in private equity and hedge funds. Abu Dhabi has acquired stakes in Leon Black’s Apollo Management and the Carlyle Group this year and Dubai International Capital has taken a 9.9 per cent stake in the hedge fund Och-Ziff.
These institutions are conduits through which SWF can make other investments. They get first look at deals in emerging markets in which SWFs can invest, either through or alongside them. McKinsey estimates that the ADIA allocates 50 to 60 per cent of its fund to equities and a further 20 per cent to private equity and other alternative assets, so it is hungry for opportunities.
An interjection, there are very large signs that the PE funds are indeed hunting value in the larger emerging markets, although it is not clear to what extent that is trickling into middle to smaller ones. Some signs, but smaller markets are harder to deal with - for all that in my personal view, offer better value presently.
One thing it is not is stupidity, which was the parochial explanation bandied about in New York this week for the willingness of Gulf investors to expose themselves to dollar weakness and US subprime mortgages. Those who want to believe that expertise is confined to the west whisper that “the Arabs” have more money than sense.
Indeed, while the Gulfies en masse remain... well, to be charitable, less-than-sophisticated as such on a popular level, the elite learned much from burning their fingers and their money in the 1970s.
And much of the expatriate managerial class emerging in Dubai etc. is not just hired Western guns, but Lebs, Palestinians, Palestino-Jordanians, etc who expatriated to the West during the baddest days and have returned. As well as regional talent being sucked in, although as Gapper notes in a related arty, many flaws remain for all this relative success compared to the 1970s (the comparison implicit).
Not enough, local talent (meaning Gulfies) but the region is benefiting rather more substantially in the private sector than the last oil booms.
Returning to the arty,
There is little evidence of that [Lounsbury: stupidity as stereotyped from the 70s boom]. Domestically, it makes sense for the Gulf governments to invest their financial holdings into a variety of assets and to take risk. Many oil-rich states suffer the “resource curse” – the tendency for oil wealth to lead to corruption and lassitude. Gulf states such as the UAE and Qatar are trying to escape the curse by diversifying their economies and assets.
They are doing so in a professional manner. As I wrote last week about Dubai, the Gulf states are buying in expertise in the form of expatriate professionals from consulting and financial firms. According to one banker who has worked with the ADIA, it has hired 1,300 professionals from Wall Street and City firms in the past five years. It does not simply take the word of companies and banks that roll up asking for cash.
They are also getting better at navigating the sensitivities raised by Arab governments investing in western companies, after the fiasco of DP World having to shed its management of US ports when it acquired P&O last year. The recent Gulf investments in financial institutions, and in AMD, the US chip company, and Sony of Japan have not raised too many hackles.
There is no reason why they should – quite the opposite, in fact. Funds such as the ADIA have a clear rationale for taking stakes in US companies and are content not to insist on board representation or strategic control. If these investments work, it will help them to broaden their economies and to avoid the social instability common in oil-dependent countries.
Meanwhile, the money spent on energy by US consumers and businesses is flowing back into the country in the form of capital at a time when it is urgently required. Financial crises call for deep-pocketed investors willing to support institutions in return for the chance of outsize returns and the Gulf states have arrived on cue.
If all of this capital were locked up in Swiss bank accounts and houses in Hampstead, or deposited solely in Treasury bonds and driving down yields while US financial institutions were starved of support, that would be a reason for Americans truly to worry. As it is, they have the luxury of working out what to think about an influx of Arab equity. Mainly, they ought to be thankful.
Nevertheless, I continue to predict that the MEMRI driven xenophobes will indeed react, even though, as Gapper writes, they ought rather to be thankful.
A further observation on this, taken from Gapper's other arty:
Apart from money, all it takes is will. Most countries lack it. Politicians have no incentive to award preferential treatment to a bunch of privileged outsiders. The idea that the natives will benefit from opening their borders to others who know more than they do is a tough sell.
There are probably many Washington politicians who realise that the “war on terror” paranoia that has closed US borders to many skilled immigrants is misguided, but it plays in Peoria. Sheikhs have an advantage in this regard: they are not constrained by democracy.
It is indeed this nativism that drives irrational policy.
Given the WSJ was able to write as reported in FT, darkly of Arab interests, one can expect irrationality:
The Wall Street Journal’s editorial page this week recalled that Sheikh Zayed, father of the current ruler of Abu Dhabi, owned the fraud-ridden Bank of Credit and Commerce International in the 1990s. It warned that “Arab interests will now have inordinate sway over America’s largest bank”, since Prince al-Waleed bin Talal of Saudi Arabia already holds a 3.9 per cent stake. ...
But what can the US expect if it lives beyond its means in the way it has in recent years? Its consumption patterns and use of energy have turned other countries into its piggy bank. The credit squeeze has left its financial institutions with weakened capital and in need of equity that Arab funds can provide.
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On Schumer, could it be that his "hostility" to Dubai as opposed to his "sympathy" for Abu Dhabi is related to networks/ties/contacts/etc. reflecting the competition between those two cities?
The difference is clearly in the money center banks direct interest and the fear that a Citi meltdown (which is or was not out of the question given their poor risk exposure to 'exotic' instruments tied to sub prime mortgages).
Dubai vs Abu Dhabi has fuck all to do with it, no, it is his backers (NY money center banks, fin sector in finance) balls on the block versus mere industrial (Ports, Logistics) or non core (e.g. NASDAQ which is not in crisis and one can posture over) interests.
Schumer has always been a dim whore, as I recall from when I lived in NY and is one of the arguments in my mind as to why American democracy resmebles presently with its gerrymandering, 19th c. UK rotten bouroughs in many unhealthy ways.
Posted by: The Lounsbury at December 8, 2007 06:55 PM
Schumer is just Hillary without the glamour.
The depressing part is that Hillary may take over the entire country. Depressing because Hillary is Schumer without his political savvy and social intelligence.
No, I'm not kidding.
Posted by: pantom at December 21, 2007 11:30 PM
And welcome back, been a long fucking while, eh?
Posted by: The Lounsbury at December 22, 2007 03:45 PM
I'm debating whether to become human again. I suppose I don't really have a choice in the end...
Posted by: pantom at December 22, 2007 08:04 PM
Ah mate, human, machine... Good to hear from you again.
Myself, as I am working on a major financing and we have a line open that is unimpeachable, well, it's a fucking sellers market when you got liquidity in a liq. scare enviro, eh?
Risk officer may not agree, though, but I should be sure we bank the fees.
Posted by: The Lounsbury at December 24, 2007 03:59 PM