Abu Dhabi Pumping $7.5B Into Citi

 

Abu Dhabi Pumping $7.5B Into Citi
Liz Moyer, 11.26.07, 11:31 PM ET

Citigroup is still in search of a chief executive, but it has found an angel.

The Abu Dhabi Investment Authority is sinking $7.5 billion into the largest U.S. bank, shoring up its capital after billions in write-offs related to subprime mortgages.

The state investment fund will receive securities that will be convertible into no more than a 4.9% stake in Citi, the financial services giant said Monday night. It is a sizeable investment at a time when many investors and pundits are calling for major changes at Citigroup, including a possible breakup of the company. (See: “Citi: Size Doesn’t Matter”)

One of Citi’s largest individual shareholders, Saudi Arabia’s Prince Alwaleed bin Talal, who is said to hold about a 4% stake, has pressed for tighter cost controls at the company since last year. Chief Executive Charles Prince quit earlier this month as Citi faced another $10 billion to $13 billion of additional write-downs in mortgage security holdings and after losing the confidence of the board and major shareholders. (See: “Another Wall Street Chief Falls”)

A search committee led by Citi director and ex-Treasury head Robert Rubin has yet to come up with a successor, adding more downward pressure to Citi shares, which have declined 20% since the beginning of November. John Thain, one contender, took the vacant chief executive job at Merrill Lynch, another firm that is reeling from subprime mortgage exposure. (See: “Merrill Hires Mr. Fix-It”) Another possibility is Robert Willumstad, the chairman of American International Group, who left Citi two years ago after being passed over for the top job at the bank.

"This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," acting chief executive Win Bischoff said in a statement Monday night.

“It builds on a series of actions we have taken over the past several months to strengthen our capital base, which have included sales of certain non-strategic assets, the issuance of trust preferred securities, and the previously announced plan to use common stock to purchase 32% of Nikko Cordial in Japan,” he added.

The deal is the third big investment in a multinational made in recent weeks by the oil-rich sheikdoms of the United Arab Emirates. An investment vehicle of the ruler of Dubai announced earlier Monday that it was buying a stake in Sony that was also believed to be under 5%, and a state-run Abu Dhabi fund struck a deal Nov. 16 to take an 8.1% stake in AMD.

Apart from the mortgage securities exposure, one of Citi’s biggest problems in the last few years has been holding down expenses, which have outpaced revenue growth for several quarters. Citi cut 17,000 jobs earlier this year and said it was going to embark on a major cost control initiative. There were reports Monday that many thousands more jobs would be cut in the wake of its current problems.

A Citi spokesman wouldn’t put a number to the cuts, but acknowledged, “We are engaged in a planning process in anticipation of our new CEO and our business heads are planning ways in which we can be more efficient and cost effective to position our businesses in line with economic realities.”

Analysts, notably CIBC World Markets’ Meredith Whitney, have warned that the company’s declining capital levels mean it either needs to sell assets or cut its dividend to shore up capital. At the end of September, Citi’s main capital level, called Tier 1, was 7.3%, below the company’s 7.5% target, but above the regulatory red line of 4%.

The investment by Abu Dhabi will apply to Tier 1 capital. "This investment also enables us to access capital in an efficient manner, and is consistent with our strategy of maintaining a balance sheet that benefits from highly diverse sources of funding in terms of both geography and type of security," Bischoff said in the statement.

Now all they need is a permanent chief executive.