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Buddy, can you spare a few billion dollars?

US banks seek foreign govt, other funds, but for how long will they be obliged?

(NEW YORK) First hard-pressed Wall Street banks turned to rich foreign governments for help. Now, they are seeking aid from the likes of New Jersey and big mutual funds to bolster their weakened finances.

Citigroup and Merrill Lynch said on Tuesday that they were raising a combined US$19.1 billion from parties that range from government- backed funds in Korea and Kuwait to New Jersey’s public pension fund and T.Rowe Price, the big mutual fund company.

Other investors include a large bank in Japan, a hedge fund in New York and private investors in the Middle East.

While so-called sovereign wealth funds are investing the most, the emergence of new investors like New Jersey underscores the rising aversion on the part of US banks to being seen as beholden to foreign governments. In recent months Citigroup, Merrill and several other banks have sold multibillion-dollar stakes to foreign government funds.

The latest sales came as Citigroup reported a US$9.83 billion loss for the fourth quarter, the biggest loss in its history, and Merrill prepared to disclose further huge charges yesterday. Banks worldwide have written down the value of mortgage-related investments by more than US$100 billion, and some analysts warn that figure could double as the mortgage crisis grinds on.

Citigroup’s new round of capital- raising was headlined by a US$6.8 billion investment by the Government of Singapore Investment Corp and a smaller investment by the Kuwait Investment Authority (KIA).

Capital Research, a big US investment firm, and Prince Alwaleed bin Talal of Saudi Arabia – both long-time Citigroup shareholders – are also investing, along with the New Jersey Division of Investment and Sanford Weill, Citi’s former chairman and chief executive.

Merrill, meantime, is raising US$6.6 billion, mostly from the Korean Investment Corp, the KIA and the Mizuho Financial Group of Japan. Merrill also attracted investment from T.Rowe Price, TPG-Axon, a New York-based hedge fund, and the Olayan Group, a private company based in Saudi Arabia.

‘There is still a lot of wealth out there,’ said Edward Yardeni, an independent investment strategist. ‘The financial institutions are scrambling to shore up their capital but they also want to make sure that they get it from diversified sources. It also gives them political cover and shows that they are not just dependent on the sovereign wealth funds.’

Driving all these investments is the assumption that the beaten down stock of Merrill and Citigroup represents good value.

In the case of New Jersey, William Clark, the chief investment officer of the state’s US$81 billion pension fund, approached both Citigroup and Merrill and agreed to invest US$400 million in Citigroup and US$300 million in Merrill.

Even after these investments, the New Jersey fund has an underweight position in financial stocks.

‘This fits the strategy of our portfolio,’ said Susan Burrows Farber, the chief administrative officer of the fund, adding that New Jersey was open to making more of these types of investments.

For T.Rowe Price and Capital Research, which already own shares of Merrill and Citigroup, the decision to increase their stakes may represent less a statement of confidence than a willingness to take a new slug of stock and reduce the cost of their substantial positions.

TPG-Axon, a US$9 billion fund run by Dinakar Singh, a former Goldman Sachs executive, is responding to a capital call from a weakened investment bank for the first time.

Another new presence is the Olayan Group, a private investment company founded by the late Suliman Olayan, a Saudi billionaire who made his fortune by investing in areas like food distribution and infrastructure. According to a person with knowledge of the discussions, the investment was headed by Hutham Olayan, leader of the group’s activities in the Americas and a board member of Morgan Stanley.

Mizuho Financial is the second- largest financial institution in Japan. The Korea Investment Corp is an investment fund begun by the Korean government to make more aggressive investments with the country’s rapidly accumulating foreign exchange reserves.

What remains unclear is how long overseas investment entities will remain patient with US banks if the financial industry continues to suffer. Since Citic Securities in China invested US$1 billion in Bear Stearns last fall, sovereign funds have invested more than US$50 billion in weakened banks.

That is a small amount compared with the US$2 trillion in these funds, to say nothing of additional trillions in central banks and other related entities.

But no one likes to lose money, even funds that have very long investment thresholds.

‘At some point these investors will say no,’ said Mr Yardeni. ‘So far these investment have been value traps as opposed to good value.’

Yet with oil prices increasing, sovereign funds and other government- sponsored funds are likely to generate investment surpluses approaching US$8 trillion in the next five years, according to McKinsey & Co’s research arm.

‘What we find is that a lot of this liquidity is still in Treasury bills,’ said Diana Farrell, an analyst at McKinsey who has studied these funds. ‘This is really just the beginning.’


Source: NYT (Business Times 18 Jan 08)

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