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Friday, January 11, 2008

Chinese, Saudi to Invest in Citibank

Is this just another day in "paradise"?   Wall Street bankers just created another channel for Dollar recycling: this time bundle themselves with non-transparent SWFs. With deals making at such high frequency, I am wondering whether this is a result of bankers' hard begging, or it's just another case of government "spending others' money on someone else".
 
Source: WSJ.

Alwaleed, China to Invest in Citi

Prince Alwaleed bin Talal is poised to once again come to the rescue of Citigroup Inc.

This time, the Saudi billionaire is expected to be joined by other investors, including the China Development Bank, people familiar with the matter said. While it isn't clear how much Prince Alwaleed will invest, the Chinese entity is expected to invest roughly $2 billion, one person said. Prince Alwaleed's total stake in Citigroup is likely to remain below 5% in order to avoid regulatory scrutiny. However, given that Citi has a stock market value of $140 billion, even a 1% stake would end up being a significant sum of money, and a potential vote of confidence in the struggling bank.

While Citigroup is still working out details of the planned investments, and there's a chance they could fall apart, the bank is hoping to collect a total of $8 billion to $10 billion from a number of investors, likely including at least one fund affiliated with a foreign government, the people said.

China Development Bank was set up in 1994 as one of the country's three policy banks. On Dec. 31, China's sovereign wealth fund China Investment Corp. made an infusion of $20 billion into the bank, in an move to turn the bank into a commercial lender.  

This would be at least the third major investment by a Chinese institution in a struggling Wall Street firm. China Investment Corp. is investing $5 billion in Morgan Stanley, while Citic Securities agreed to a $1 billion investment in Bear Stearns Cos., though Bear will also invest that amount in the Chinese firm, albeit over many years.

Citi is also talking to other existing shareholders, including U.S. investment funds, to potentially up their stake in  the bank.

A cash infusion would leave Prince Alwaleed in a familiar role. In 1991, he pumped $590 million into what was then known as Citicorp. The investment, which was in the form of a private placement of convertible preferred stock, gave him an ownership stake of nearly 15% at the time. For years, he was Citi's largest individual shareholder.

Prince Alwaleed ceded that title last month, when Abu Dhabi's investment arm paid $7.5 billion for a 4.9% stake in the cash-strapped company.

In recent weeks, though, the bank's troubles have continued to pile up. Citigroup decided to bring onto its balance sheet $49 billion in assets from seven struggling investment affiliates, a move that further depleted its already weak capital ratios. The New York conglomerate also is facing more than $15 billion in fourth-quarter losses stemming from its exposure to mortgage-related investment vehicles.

Citigroup is hoping to unveil the investments Tuesday when it reports fourth-quarter earnings. At the same time, the company also could announce that it is cutting its dividend payment.

Thanks to his large stake, Prince Alwaleed has wielded considerable influence at Citigroup. In 2006, he publicly warned Citigroup's then-chief executive, Charles Prince, that he needed to take "Draconian" steps to contain the company's spiraling expenses. Months later, Mr. Prince followed up with a cost-cutting plan that included the elimination of 17,000 jobs, or about 5% of Citigroup's workforce.

Despite Citigroup's struggles through the first three quarters of last year, Prince Alwaleed continued to publicly support Mr. Prince. But last fall, as Citigroup executives realized they were facing billions of dollars in write-downs, Prince Alwaleed withdrew that backing. In early November, Mr. Prince handed in his resignation.