COMMENT Selling the US by the dollar By Julian Delasantellis
Precisely as I have been predicting since mid-August, foreign state-owned
investment pools, sovereign wealth funds (SWVs), have now commenced the process
of riding to the rescue of the poor, weakened, self-mutilated US financial
system.
I hate to be smug and
tell you "I told you so." Ah, come on, who am I
trying to kid? I absolutely love to be able to say
that, just as much as the next boorish preening
pundit.
It was announced prior to the opening of trading on Tuesday that the Abu Dhabi
Investment Authority, the world's largest SWF, was paying US$7.5 billion to buy
a 4.9% stake in Citigroup, the largest financial institution in the United
States. Citigroup, facing what the markets fear may amount to a $30 billion or
more hit on its capital base due to its problems with subprime mortgages
and
associated derivative financial products, recently had its chief executive
officer, Charles O Prince, fall on his sword in an effort to satisfy the mobs
of angry shareholders. This did little to assuage the howling furies; they're
still lashing the company, with sell orders whipping off their computer mice.
The stock is down over 45% this year, almost 25% this month.
Citigroup did rally on the news, but the price move was far from anything all
that impressive - the stock rose about 1.75%.
Citigroup's rescue did not come cheap. The deal was structured in the form of
convertible securities that will require the company to pay junk-bond levels of
coupon interest, reported by Barron's to be close to 11%, for the privilege of
selling part of America's premier consumer financial institution into foreign
hands.
For me, the most surprising,
and possibly the most upsetting thing about the
Citigroup news was the absolutely orgiastic
reaction to it. The general media, of course, saw
this only in the context of something that would
cause the stock market to go up, so it must be
good. (Dead white American suburban young women =
bad, rising stock prices = good; it's not that hard to be a US TV news
producer these days.) The Dow Jones Industrial Average opened strong, gave up
most of its gains midday, then was rallying into the close to finish up 215, a
fairly average price change these days.
If the electronic media are now history's first draft, then, to judge by the
reaction of the on-air personnel on business cable channel CNBC, America has
just had its best day since the famous New York City Times Square victory
celebrations at the end of World War II.
All day long the smooth and clean faces of CNBC shone happy and bright,
overjoyed that, just as the losses in the Dow in the past two months had
reached the psychologically important 10% level the previous day, at last a
savior had arisen. Surely, almost as if the financial markets had become a sort
of children's holiday pageant, the Abu Dhabi Investment Authority was a modern
John the Baptist, proclaiming the good news of imminent salvation, namely, lots
more foreign SWF money to refloat America's sagging markets, economy and
spirits.
Defying any and all naysayers, CNBC anchor Dylan Ratigan summed up the Good
News for modern traders:
At the end of the day, though, we could spend
four hours talking about all the terrible things that could potentially still
happen, today's a good day - $7.5 billion for the banking system came in, for
better or worse. Granted its only 1% of all the money in Abu Dhabi, granted
that there could be future writedowns, but at the end of the day, $7.5 billion
is a lot of money.
Of course, what's going out as the $7.5
billion comes in is the shining jewel called ownership. The origins of
Citigroup go back to the founding of the City Bank of New York in 1812. Over
these past 195 years, the institution has been carefully built and nurtured,
and its prosperity has enriched countless thousands of American stockholders.
That wealth creation, as it circulated around and across the American economy,
also enriched the American community as a whole.
Then comes the first decade of the 21st century. Citigroup goes for the gusto,
grabs for the brass ring, reaches out for the fat, seemingly riskless returns
being offered by a new generation of subprime mortgage derivative products.
This experiment goes horribly wrong for Citigroup, as it has for much of the US
financial system.
Citigroup then has a choice, as does the rest of the financial system, as does
the rest of the country. Accept a year or two of diminished earnings, dividends
and prosperity, until the entire subprime thing works its way through and out
of the financial system, or sell out and attempt to once again live the good
life that much sooner.
The cost? The cost, of course, is that in the future commensurately fewer
Americans will be enjoying the fruits of ownership that have accrued through
the hard work, enterprise and ingenuity of this two-century-old venture.
As has been proven so many times in the recent past, from America's budget and
trade deficits to its crumbling infrastructure, its appallingly dysfunctional
primary and secondary school system, its non-existent savings rate, and the
total diffidence with which it approaches the global environmental impact of
its prosperity, this is a country that looks at the prospect of any pain or
inconvenience in the present with such boundless levels of abhorrence that it
is more than willing to satisfy its heroin-like addiction to immediate
gratification with sales of any or all of its national heirlooms.
A comparable absurdity would be Americans selling their houses and forever
being renters in order to gain the requisite funds to, in the newly sacrosanct
modern tradition, line up at big box electronic retailers in the cold early
hours of the morning after Thanksgiving.
Wait a minute. As a matter of fact, that's precisely what the Americans who
took out home equity loans to spend away the appreciated wealth locked up in
their homes have done. It's no wonder that Citigroup doing the same thing looks
so normal.
In essence, in commencing the process of selling away America's remarkably
innovative and profitable financial system, the country will now be paying a
rent, in the form of the profits accruing to Abu Dhabi and the other SWF buyers
that must surely follow its lead, equal to what it once collected for itself.
A recent survey of students at New York University revealed that two thirds of
them were willing to sell away their right to vote in exchange for next year's
tuition (which is over $47,000 for tuition, room and board - at least the
youngsters are not selling themselves cheap); half said that they'd be willing
to forever forfeit their franchise for a cool million dollars.
Middle-aged power pundits and basic cable savants were aghast, oh dear, what
has become of the values of the young?
But in reality, weren't the little tykes at New York University just, as
children are wont to do at any age, imitating their parents, in that everything
timeless and hard-won, sacred and cherished, can and should eventually be
bartered away for a current comfortable price?
One thing about Abu Dhabi's investment that seemed to particularly please the
pretty CNBC on-air faces was their speculation that Citigroup's stock dividend,
worth currently about 8% of the stock's market price, might now be that much
more safe from a possible cut.
Well, there's good news. It means that America's legions of coupon-clipping
Paris Hilton wannabes will thus be more likely to be spared the
soul-extirpating experience of shopping at Rodeo Drive rather than Macy's this
holiday season.
Take care, wherever you are. Even if Paris Hilton still hasn't got her driver's
license back, by any means necessary America is getting its money back; the
practical effect is just about the same.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
