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Flailing U.S. Bank Beckons Gulf Nation Investors
November 29, 2007 12:46 PM
by
findingDulcinea Staff
Troubled banking giant Citigroup sells the state-run Abu Dhabi Investment Authority a portion of the company worth $7.5 billion, the latest in a string of Gulf nation investments made as the dollar tumbles and oil prices rocket.
30-Second Summary
Citigroup publicly announced the deal, inked over the long Thanksgiving weekend, on Monday, Nov. 26. The ADIA is buying a 4.9 percent stake, making it the largest single shareholder in the New York banking conglomerate.
With the credit crunch showing no sign of letting up, the dollar at a historic low, and fears of a U.S. recession running high, Wall Street investors and concerned politicians welcomed the influx of Middle Eastern money.
Sen. Charles Schumer (D-N.Y.), chairman of the Joint Economic Committee and a senior member of the Senate Banking and Finance Committees, said that the ADIA transaction “will bolster Citigroup’s capital and competitiveness, and thereby help preserve New York’s status as the world’s financial center.”
This sale was the latest in the United Arab Emirates’ worldwide shopping spree. Abu Dhabi and Dubai, the two richest regions of the UAE’s seven-emirate federation, have an estimated $5 billion to spend per week on financial holdings thanks to oil and gas revenues, according to Edward Morse, the chief energy economist at investment firm Lehman Brothers.
Other recent acquisitions by state-run firms in the UAE include Istithmar’s purchase of luxury fashion chain Barneys New York and a proposed bid for a 20 percent stake in a newly unified company comprising NASDAQ and OMX, the Nordic stock exchange.
Commenting on the deluge of dollars in the oil-producing regions, J. Robinson West, Chairman of PFC Energy, told The New York Times, "We are seeing a transfer of wealth of historic dimensions."
With the credit crunch showing no sign of letting up, the dollar at a historic low, and fears of a U.S. recession running high, Wall Street investors and concerned politicians welcomed the influx of Middle Eastern money.
Sen. Charles Schumer (D-N.Y.), chairman of the Joint Economic Committee and a senior member of the Senate Banking and Finance Committees, said that the ADIA transaction “will bolster Citigroup’s capital and competitiveness, and thereby help preserve New York’s status as the world’s financial center.”
This sale was the latest in the United Arab Emirates’ worldwide shopping spree. Abu Dhabi and Dubai, the two richest regions of the UAE’s seven-emirate federation, have an estimated $5 billion to spend per week on financial holdings thanks to oil and gas revenues, according to Edward Morse, the chief energy economist at investment firm Lehman Brothers.
Other recent acquisitions by state-run firms in the UAE include Istithmar’s purchase of luxury fashion chain Barneys New York and a proposed bid for a 20 percent stake in a newly unified company comprising NASDAQ and OMX, the Nordic stock exchange.
Commenting on the deluge of dollars in the oil-producing regions, J. Robinson West, Chairman of PFC Energy, told The New York Times, "We are seeing a transfer of wealth of historic dimensions."
Headline Links: The UAE goes to Wall Street
The sudden influx of Gulf funds is a boon to embattled Citibank, whose shares have plunged since October. The deal was solidified over Thanksgiving weekend after a series of phone calls and a last-minute trip by Citigroup chairman Robert Rubin to Abu Dhabi, which is the richest city in the world according to The New York Times.
Source: The New York Times
The petrodollar is all-powerful and oil-producing countries are on a spending spree, riding on a wave of cash as oil prices per barrel flirt with the century mark. Edward Morse, chief energy economist at Lehman Brothers, said of the rush of cash from the Persian Gulf, “These are tiny countries, but they have to place collectively over $5 billion a week from their oil revenues. It’s not an easy thing to do.” The recent rush of petrodollars is causing a worldwide “transfer of wealth of historic dimensions,” said J. Robinson West, chairman of PFC Energy.
Source: The New York Times
Background: The United Arab Emirates
The United Arab Emirates (UAE) is a federation of seven independent sheikdoms. While each emirate is semi-autonomous in civil and investment law, they function together for purposes of foreign policy and defense. Oil was first discovered in the area in 1958, and forms the base of the country’s enormous wealth.
Source: National Geographic
Before oil was discovered in the UAE, the local economy relied primarily on pearl diving and fishing. When it started to export oil, this Gulf nation’s coffers and society were rapidly transformed. Sheik Zayed al-Nahyan, then ruler of Abu Dhabi, the largest emirate, ensured that the hydrocarbon revenues were reinvested in social infrastructure such as education and healthcare, as well as immovable investments such as real estate. In the past decade the emirates, particularly the two richest of the seven, Abu Dhabi and Dubai, have divested their petrodollar earnings into overseas financial holdings.
Source: The BBC
Key Players: The UAE’s rulers
Sheik Khalifa bin Zayed al-Khalifa is the ruler of Abu Dhabi. In accordance with the constitution, he is also the president of the UAE. He assumed that dual role upon his father’s death on Nov. 4, 2004. Two principal goals of his rule have been liberalizing the economy to allow for more private investment in the emirate and limited democratic reforms. He is working to diversify the UAE’s economy to move away from its reliance on hydrocarbon revenues. Since mid-2006, Sheik Khalifa has also been the chairman of the Abu Dhabi Investment Authority, also known as the Abu Dhabi Investment Company, which manages the emirate’s finances.
Source: The Emirates Network
Time magazine describes Dubai’s ruler Sheik Mohammed bin Rashid al-Maktoum as a visionary and a cunning businessman. Writer Scott MacLeod says that the sheik is “a man of many guises—poet; champion horseman; UAE vice president, prime minister and defense minister—Sheik Mo [as he is informally known] sees himself as CEO of Dubai Inc.” Ascending to the throne in 2006, Sheik Mo has continued the development began by his father, Sheik Maktoum, which includes a host of free zones for international businesses; financial centers; a top-rated airline, Emirates; the world’s largest manmade islands and a shopping mall that is home to an artificial ski slope.
Source: Time
Opinion & Analysis: Why are Gulf investors coming to America?
Dubai-based financial magazine Arabian Business says that the Abu Dhabi Investment Authority–Citibank deal may trigger a wave of sudden buy-ups on Wall Street from oil-producing countries. Investors from countries flush with petrodollars may be just the ticket for Wall Street companies who are looking to revive their stocks. The current economic climate in the United States minimizes any red tape and scrutiny that external investors could otherwise face. This particularly applies to Gulf-based investors, of which some American politicians have been wary. Dubai’s state-owned private equity firm Istithmar, who recently acquired U.S. luxury retailer Barneys New York, said in September that it was considering buying stakes in two unnamed U.S. companies badly hit by the sub-prime mortgage crisis.
Source: Arabian Business
Reference Material: The UAE investors
The official Web site of the Dubai International Financial Exchange (DIFX) includes live stock updates, a list of brokerage firms handling Dubai-based securities and general information about the stock exchange.
Source: Dubai International Financial Exchange
The Abu Dhabi Investment Company’s official site includes annual reports, statements from the governing board, and a breakdown of its activities.
Source: Abu Dhabi Investment Company
Related Links: The American economy
For more information on the declining U.S. dollar, the historically high price of oil and the sub-prime mortgage crisis, see our Beyond the Headlines stories:
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