The Nation: Sovereign Wealth: Theirs, Not Ours

howl | posted December 7, 2007 (web only)
Sovereign Wealth: Theirs, Not Ours
Nicholas von Hoffman



Every day a new thrill and every day a new spill in the not-so-little world of real estate, subprime mortgages, hedge funds and supposedly unshakable financial institutions. Who got gored today? Who will be bleeding tomorrow? Who will get saved? How? When? And who got hurt when who got saved? It's a good story, but you might want to run for cover while reading it.

Since having announced that it has lost billions in the subprime mortgage business, Citigroup has sold a chunk of its stock to the Arabs. In this case Abu Dhabi came running with $7.5 billion to invest in an institution that seems to be reeling from losses of around $11 billion. But in fact we do not know what the situation is inside Citigroup, and there is reason to fear that the people running Citigroup don't either.

There has been discussion about whether the Abu Dhabi input was a good deal or a desperate lunge for safety by Citigroup, which has fired CEO Charles Prince for doing an outstandingly lousy job. The Investment Authority will receive equity units that pay an 11 percent annual yield--a high price for Citigroup, whose customary dividend yield is 7.3 percent. Citigroup must have had great and hurtful needs for this money, to pay so much.

Some are less worried about what Citigroup is having to put out to save itself than about creeping foreign ownership of American companies in general. The Abu Dhabi purchase was made by that country's sovereign wealth fund, not by an individual sheik or princeling. A sovereign wealth fund is a bunch of money set aside by a government that is so far in the black that it has extra money to invest. The United States--does one need to say?--has not such moneys.

In the past nations with excess cash often used it to buy US government bonds because they were safe and steady and the interest rate on them was pretty good. Today the rate on them is deemed highly sucky, and the value of the dollar is getting smaller almost by the hour. So governments are going out and investing in private US companies--which, like Citigroup, may pay handsome dividends and appreciate in value. ......(more)

The complete piece is at: http://www.thenation.com/doc/20071224/howl