Citigroup gets help from Abu Dhabi

Bob Moon Nov 27, 2007

Citigroup gets help from Abu Dhabi

Bob Moon Nov 27, 2007


BOB MOON: One of the rays of sunshine that helped warm things up on Wall Street today was word of a $7.5 billion lifeline for Citigroup. The sovereign investment fund of Abu Dhabi, a country rich with oil money, is giving America’s biggest bank some much needed capital to offset its big mortgage losses. The investment will make the Abu Dhabi Investment Authority the biggest single shareholder in Citigroup, but it will not have the authority to name any board members. For some insight into how significant this news is, we turn to David Wighton, U.S. Banking Editor for the Financial Times. Thanks for joining us.

WIGHTON: My pleasure.

MOON: I saw a Reuters report today that says analysts think this may signal that the free fall in the U.S. financial stocks is close to ending. On the other hand a Bank of America analyst issued a report today saying he thinks that this buys Citigroup some time, but he said capital infusions don’t solve problems overnight. To be blunt about it, is this going to be enough to save Citigroup from this crisis?

WIGHTON: Well, it’s enough to get their balance sheet back to where they would like it to be. And it will be enough unless we see significant further write downs in their holdings of mortgage-backed securities. And the big question of course is what happens to the U.S. economy next year. If the U.S. economy goes into recession, then all bets are off.

MOON: Well, speaking of taking things onto your balance sheet, was this a desperate move by Citigroup to seal this deal? It’s paying a very high price for this lifeline. Initially these securities pay a mandatory interest rate fixed at 11 percent. One of our editors here compared that to trying to bail yourself out by charging your mortgage payment to a high-rate credit card. Is it something like that?

WIGHTON: It does look very expensive, but their stock is very depressed, and they’re paying a very heavy dividend on those shares. So it is very expensive, but they think it’s better than cutting the dividend or by selling businesses that they think are strategically important to the company going forward.

MOON: Well Citigroup shares have lost around 45 percent of their value since the start of the year. That has wiped away around $120 billion in market value, market capitalization. Is Citigroup starting to get itself bailed out here, or how much of a risk is there that it could keep sinking?

WIGHTON: The stock looks very cheap at this level, and it’s very striking that the Abu Dhabi Investment Authority were prepared to put in $7.5 billion, which is a tidy sum even for them, into a company which currently doesn’t have a permanent chief executive.

MOON: With Middle Eastern countries building up so much financial might, are we going to see this play out for other big banks that are in trouble, and might be a good value for this kind of investment right now?

WIGHTON: We do think there could well be other Western financial institutions who need to sure up their balance sheet after the effects of the subprime mortgage meltdown in the U.S. Companies like UBS who might look to do similar deals, and we know there is great interest among the state-owned investment companies in the Middle East and in Asia, in U.S. financial stocks, which they think are a better value than domestic U.S. investors.

MOON: If that begins to happen, do you see the chance of eyebrows being raised politically?

WIGHTON: The move by the Abu Dhabi has been welcomed by several mainstream U.S. politicians, but suddenly Citigroup is wary, and so are the Abu Dhabi Investment Authority, about any larger stake than 5 percent. Political sensitivities are important here.

MOON: David Wighton is U.S. banking editor for the Financial Times. Thanks for your insights.

WIGHTON: Thanks a lot.

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