Merrill and Citigroup are back at it again. Surprised? You shouldn't be. This was discussed on the very first cash infusion in November [Citibank Sells Stake to Abu Dabi]... the media trumpets, "the bottom is in!", "smart money is buying!" blah blah blah and blah. Meanwhile I was writing:
For those who have been reading along for a while, you know this is something I have been calling for (not specific to Citibank but large parts of our economy) as has Cramer. With strengthening currencies worldwide versus ours, acquisitions are 'cheap' in their currencies, and faltering stock prices make acquisitions and sizeable stakes even cheaper for foreign entities.
I truly think this is only the beginning - if it is a good, bad, or indifferent thing I will let someone argue that. We have undertaken bad policies, and our compensation system in this country is based on short term risk taking (try to generate outsized performance in a short time frame 2-4 years, get rewarded handsomely and ride off into the sunset with massive compensation gains, even if fired, while someone else is left to clear up the mess). Since this is our system, this is the playbook we have to live by. And the 'free market' will take care of things in the long run. Weakened institutions will be taken over. Remember China took a stake in Bear Stearns already and in the financial system I believe by late 2008, most of those that are left standing will have major foreign equity stakes. I also see this in many other industries as major macro economic forces work against the US and our dollar continues to crater.
But in the coming few years I expect to see a flood of Canadian, Australian, Middle Eastern, and Far East acquisitions. If nothing else this will put a floor on the value of US assets. Sovereign funds are going to be the next "big thing", and their buying power is going to make private equity and hedge funds look like minnows.
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Heck Merrill was just going hat to hand to Singapore not even 2 WEEKS AGO [Merrill Lynch Tapped Signapore - next China and Middle East] A writer on Minyanville.com has used the term 'reverse colonization' which I have been using as well - great wording and how accurate. Truly we are a debtor nation from top to bottom - from individual to corporation. We should just be thankful that people worldwide continue to extend us 'credit' and not call us for our debts to be paid.
As for the money center banks its a sickening cycle. As they write off more, their balance sheet assets erode and they fall below capital requirements... so they need new capital. So far its been mostly mortgage backed securities (of the worst loans), but if this cycle truly plays out in a wave of defaults by consumers on the higher grade loans (alt A, prime) then auto loans, then credit cards, then student loans... well these companies just have to continue writing off assets and going hat in hands to foreign countries asking for more money. It is quite pathetic. And no I don't bemoan foreign ownership but a stake out of sheer necessity to stay afloat (with gosh awful terms and/or large dilution to current shareholders) is different from a typical normal market stake. Example: Citigroup is borrowing money from Abu Dabi at an effective rate of 11%...this is rate equivalent to junk bonds. So they are BORROWING @ 11% so they can invest @ 5%. Sounds like a great business. Keep in mind it's a little different for the 5 investment banks, at some point they should have written all this junk off their books and can go back to normal business - its the money center banks that are in for years of problems.
I just really wish all these people who came blaring on TV and in blogs, and on financial sites would fess up and say "look we were wrong when we told you that after the first wave of write offs that this was the kitchen sink quarter" or "look we were wrong when we urged you to buy financials since schrewd foreign buyers were finally finding value" or "look we were wrong to encourage you into Countrywide Financial because Bank of America bought in the upper teens (now nearly $5)". Instead they conveniently don't mention it anymore. And keep repeating the same mantra. If I had a nickel for all "the bottom is in, in financials" calls I'd be able to start this fund on my own.
- Cash-strapped Citigroup (C ) and Merrill Lynch (MER) are reportedly ready to again tap foreign government-run funds to shore up their balance sheets, according to The Wall Street Journal.
- The two firms, hammered last year by writedowns related to mortgage-backed securities that led to ousters of their respective CEOs, already have reaped billions in investments from so-called sovereign wealth funds. Now Merrill is expected to pick up as much as another $4 billion from a Middle Eastern government investment fund and Citi could get as much as $10 billion from foreign sources in the Middle East and Asia, the Journal reported.
- Merrill already tapped $6.2 billion from fund firm Davis Selected Advisors and Temasek Holdings, a Singaporean state-owned investment company, on Christmas Eve. Citi sold a $7.5 billion stake to the Abu Dhabi Investment Authority, representing about 5% of the bank's shares.
- While both banks have said they expect massive writedowns, analysts have jostled to predict even greater losses. Citi, right before ousting CEO Charles Prince, said it expected to write down $11 billion, but Goldman Sachs analyst William Tanona predicted nearly $19 billion.
- Tanoma also estimates fourth-quarter writedowns at Merrill could hit $11.5 billion -- about $5 billion more than he initially anticipated.
Long Ultrashort Financial in fund; no personal position
