Abu Dhabi and Citigroup: What next? |
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Abu Dhabi Investment AuthorityAbu Dhabi Investment Authority
's $7.5 billion Funds investment in convertible bonds issued by Citigroup, the Wall Street money centre banking colossus reeling from the resignation of its CEO Charles Prince and untold billions in subprime/ CDO losses marks paradigm shift in the global financial markets. Sovereign wealth funds have now replaced private equity as the anchor investors in international banking institutions when a financial neutron bomb guts their balance sheet.
ADIAADIA
has the luxury of taking a long term perspective in its Citigroup investment. After all, Citi is a financial conglomerate with a 7 per cent dividend yield, branches and subsidiaries in more than 100 countries, crown jewel retail banking assets and a world class investment bank Salomon Smith Barney that would well be spun off just as American Express spun off Lehman Brothers in a 1994 IPO on the New York Stock Exchange.Moreover, since its shares have plunged, almost 40 per cent since the summer when billionaire hedge fund manager Eddie Lampert built a stake in the bank, ADIAADIA
bought into Citigroup at a rock bottom valuation metric, as low as 1.4 times book value. Above all, Citi has no permanent CEO and on verge of its most traumatic cost restructuring since the fateful summer of 1991, when Prince Walid bin Talal invested almost $600 million as the bank reeled from ruinous losses in the Latin American syndicated loans, Texas and New England commercial real estate and busted leveraged buyouts. If history repeats itself, ADIAADIA
could earn a windfall if Citigroup manages to survive the Wall Street credit crunch without slashing its dividend and engineers a new corporate strategy.ADIAADIA
has been investing in global financial markets across all asset classes ever since it was established to handle the emirate's petrodollar surpluses back in 1970's. While its assets under management are not known with any precision, estimates by London bankers range as high as $800 billion. Nor is Citigroup ADIAADIA's only financial investment. Abu Dhabi's sovereign wealth fund has acquired strategic stakes in LBO house Apollo Management, David Rubenstein's Carlyle GroupCarlyle Group
(demonized in Michael Moore's movie Fahrenheit 911) and Middle East stockbrokers EFG HermesEFG Hermes. Banks and brokerage houses are assets whose franchise value can be best evaluated by ADIAADIA
's money managers, who are easily the most attractive SWF buy side client for any international financiers in the Gulf anywhere between Oslo's Oil Fund and Singapore's Temasek. Yet investments international banks and brokers has meant huge reputation risk for the Abu Dhabi in the past. The emirate was the largest shareholder in BCCIBCCI
, the rogue bank whose collapse in 1991 amid fraud and money laundering meant a $5 billion loss and a blizzard of litigation that still continues. Yet a strategic investment in Citigroup offers Abu Dhabi inestimable value added benefits. A turnaround play in global bank with $2.4 trillion in assets. Access to deals, investment banking expertise, economies of scale in money management and a global profile. ADIAADIA
has managed to create a new generation of UAE technocrats and its payroll includes economists, strategists, portfolio managers and analysts from the world's major capital markets hubs. ADIAADIA
's Citigroup investment also has a political dividend. The emirate has been one of the closest diplomatic allies of the United States in the Middle East ever since the creation of the UAE Federation in December 1971. The perception that Abu Dhabi has emerged as a white knight for the American banking system contrasts with the hostility in Congress and the US media to the DP WorldDP World
- P and O's American seaport deals. Even Senator Charles Schumer of the Senate Banking Committee, who lead the protectionist firestorm against DP WorldDP World
, has not opposed the ADIAADIA- Citigroup deal brokered by the bank's legendary deal maker acting Chairman Bob Rubin, the US Treasury Secretary who managed the bailout of Mexico after the peso devaluation crisis in 1995. The political acceptability of the deal is enhanced by the fact that, despite the scale of its investments, ADIAADIA
has not sought or received a board seat in Citigroup.The ADIAADIA
- Citigroup deal is a template for petrodollar recycling in this millennium. Petrodollars, unlike in the 1970's, are no longer recycled into Euromarket deposits in money centre banks but are represented on their shareholder register. International financial crises of the future will increasingly require the participation of the Gulf sovereign wealth agencies, particularly Abu Dhabi's ADIAADIA
, Kuwait's KIAKIA and Qatar's QIAQIA. The international banking system faces a capital squeeze as subprime mortgage and credit derivatives losses have led to the failure of two German Landesbank, the depositor run on British High Street bank Northern Rock, disaster in the bottom line of Deutsche BankDeutsche Bank
, UBS and Credit SuisseCredit Suisse, Singapore's DBS and China's ICBC. The age when Arab wealth was deposited in Zurich and City of London money market instruments is now over. Arab financers are the new players on Wall Street.
© Bahrain Tribune 2007
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