Another One Bites the Dust
[Update added below: The topic of SWFs gobbling up foreign assets and the general global search for yield is very much in vogue at the moment. Below I field two additional contributions from RGE's Economonitor and Ken Worsley's Japan Economy and News Blog.]
I wonder how many blog posts and newspaper articles will carry the same headline (or a derivative thereof) in their description of the 'fall from grace' mantle which Citibank is wearing as the US bank exits Q4 2007 with a 9.83 bn USD deficit following a hefty writedown of 18.1 bn USD following the subprime debacle. Of course, this was not entirely unexpected and since Chuck Prince arranged his sortie back at the end of December it was widely held that Citibank would be on the front line when the toll from the subprime mess had to be settled. So even though the writedown was harsh we can perhaps give some residual points for expectations management here? (Even if of course the market analysts' reaction to all this has been devastating, to say the least). But, the CEO Vikram Pandit can hardly be blamed for the current mess even if it is his distinct responsibility to now clean it up, and as he said; 'We need to do better, and we will'. Moreover and as many of my readers will know Citibank is not by any means the only high flyer financial institution who have had to push the big delete button as of late. I thus present you the butcher's bill, a bill which so far amounts to 78.9 bn USD (averaging about 5.2 albeit with a long tail).
As we can see from the picture above (sorry for the split imagery but it could not fit in one graph) many an investment bank have been forced to pull the plug of parts of their balance sheet since the snowball got rolling and the list will no doubt continue. Yet, what is most interesting is clearly the extent to which these financial institutions are running to todays modern version of the debtbusters (a title they share with Japanese savers) in the form of the SWFs or derivative institutions. As such, as the FT (linked above) reports ...
Citi also said it would raise $12.5bn in new capital to shore up its balance sheet through the sale of convertible preferred securities and would cut its quarterly dividend by 40 per cent, from 54 cents to 32 cents a share. The Government of Singapore Investment Corporation will invest $6.88bn. Other investors will include the Kuwaiti Investment Authority, Prince Alwaleed bin Talal, one of Citi’s largest shareholders, and Sandy Weill, former chief executive. Citi will also sell $2bn worth of new securities to public investors.
And Citibank is not the only one tapping the SWF liquidity at the moment with Merrill Lynch moving in close behind ...
Merrill Lynch on Tuesday said it had raised $6.6bn by selling preferred shares to investors from the Middle East and Asia, as part of a second injection of funds to help shore up the US investment bank’s capital base The bank said it would issue preferred stock to ”long-term investors”, with the bulk being taken up by the Kuwait Investment Authority (KIA). Mizuho Corporate Bank, a subsidiary of Japan’s second largest bank, is taking about $1.2bn and the Korean Investment Corporation (KIC), $2bn.
Mmm hmm, the wonders of the new capital markets. To put this in perspective Brad Setser had a timely note a couple of days ago and really; if your are an investor exposed to international capital markets (well, who aren't these days?) you want to keep a weary eye on the tendencies which Setser points too.
Well, this topic is just red-hot at the moment it seems. Not so much the cracks in the Citi edifice but more so the extent to which sovereign wealth funds are letting the liquidity taps run loose as they scour the earth in the search for yield.
Rachel Ziemba from RGE's Economonitor provides a useful and detailed round-up. However, don't forget that this is not merely a question of how 'reverse' capital flows is leading to reverse globalization and reverse privatization as Brad Setser has pointed out as of late. Liquidity and the search for yield are also emmitted from other coutries as Ken Worsley succintly points out in a recent post in the context of Mizuho Corporate Bank investing about $1.2 billion in Merrill Lynch (preferred stock). And don't miss this one ...
Unlike China and South Korea, Japan has not set up a sovereign wealth fund. It’s been talked about, and pushed for most notably by former Chief Cabinet Secretary Yasuhisa Shiozaki, though ruling Liberal Democratic Party heavyweight (and former Chief Cabinet Secretary) Kaoru Yosano told reporters in September:
If you try to hit the jackpot or try to surpass average global yields, you can end up losing…If mistakes are made, the aftermath can be harrowing.
This is very true, and reflects the conservative nature of Japan’s Ministry of Finance.
But Japan is going to miss out. This year will most likely see a slew of such deals, as the petrodollars stack up and US/Japanese equities become available at stunning discounts. The Abu Dhabi Investment Authority is just gearing up. As one commenter in the Wall Street Journal piece wrote, “Please let us know when all of NY has been sold to foreign funds; maybe we can adopt the use of the Euro at that point.” (I guess that guy considers New Jersey foreign)
Japan, however, isn’t likely to be in the game. Despite having nearly $1 trillion in foreign reserves, it prefers to sit on the sidelines when real opportunities to boost yield come up.
Then again, when these sovereign wealth funds start blowing up and melting down at some point in the future, Japan can say it told us so. But the opportunity will have been lost.
Once again we have one of those to be or not to be questions it seems. But what prey tell is the main driver of these capital flows? That is the main nut to crack I think.