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Citigroup's Developmental Twist

by Travis Pantin
Mon, 14 Jan 2008 at 1:59 AM

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On the RGE Monitor blog, a fellow from the Council on Foreign Relations, Brad Setser, calls "rather ironic" Citigroup Inc.'s move to seek financial help from a development bank in China, which is itself a developing country.

Citigroup is looking to raise about $9 billion from Chinese investors in an attempt to offset the losses it suffered as a result of the subprime mortgage crisis, according to the Financial Times.

"Past troubles at Citi have often come from lending to the governments of developing countries. This time Citi is turning to the governments of developing countries for help," Mr. Setser writes.

Citigroup is soliciting funds from a wide consortium of investors, including state banks, sovereign wealth funds, and Gulf princes. The consortium is presumably constructed to prevent any single foreign investor from gaining more than a 5% ownership of Citigroup, which would trigger regulatory oversight from the American government.

According to Mr. Setser, the consortium is "composed almost entirely of government investors, and specifically investment funds from governments that do not subject themselves to a democratic vote and thus have a bit more freedom to take big risks with their money."

The sovereign wealth funds' lack of transparency could lead to uncertainty regarding their intentions and operations, he says. Moreover, America may have missed its chance to demand more transparency from them.

"I suspect that the United States lost the ability to press for a major increase in sovereign wealth fund transparency when it made a de facto decision to rely on sovereign wealth funds to recapitalize Citi, Merrill and Morgan Stanley in an effort to stem off a credit crunch," Mr. Setser writes.

"Relying on other governments to achieve a policy goal usually has a price," he writes.

Banks Acquiring Troubled Lenders
The anonymous blogger at Accrued Interest explains several implications of Bank of America's recently proposed plan to purchase the America's largest mortgage lender, Countrywide Financial.

First, he says the deal will probably help Countrywide avert a bankruptcy filing. "While I think the economy could have handled a Countrywide liquidation, it would have been painful and messy. I'm sure Ben Bernanke is happy about this turn of events."

The Accrued Interest blogger notes that the Countrywide deal makes it much more likely that Washington Mutual, another large mortgage player, will also be acquired by a large bank.

On Friday, Washington Mutual stock rallied amid rumors that JPMorgan is seeking to acquire it. The anonymous blogger sizes up the field of possible buyers.

"I heard Wells Fargo's name mentioned, and they'd have the capital, but it would be a strange marriage for such a conservative bank. You could also imagine some Mid-West or East Coast bank having interest in WaMu's geographical footprint, but I'm not sure any such banks have the spare capital to absorb WaMu's problem assets. US Bank? Fifth Third? PNC? I doubt it. If I'm Jamie Dimon," he writes, referring to JPMorgan's chairman," even if I'd really like to own WaMu, I wouldn't let BofA's move force my hand. JPM may be the only actual bidder, and WaMu is probably only going to get more desperate."

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