More good money after the bad ?

An alternative title:- "Will Citi be here next month?"

Malaysians have always held the kiashu land in awe. Many of us think they have the brightest brains and hence they can can do no wrongs. But now we know they often are just like us - talking loud and talking trash. Their GIC and Temasek had been doing 'greatly' not because they are smart but merely because the great bull market of the last decades had covered up their bad investment decisions. But now with the current great financial crisis, their black backsides are beginning to show :-


GIC and Temasek have put a combined total of more than US$30 billion of Singaporeans' wealth at risk — GIC has bet $6.9 billion on Citibank and $9.7 billion on UBS, while Temasek has bet $4.4 billion on Merrill Lynch and $9.2 billion on Standard Chartered.

ABOUT a year ago, when deputy chairman Tony Tan talked about the Government of Singapore Investment Corp’s (GIC) daring step into struggling American banking giant Citigroup, he pointed out how the deal to inject US$6.88 billion ($10.7 billion) contained “appropriate downside protection”. Memorably, he said that if one took care of the downside, the upside would take care of itself.
.
On Friday, GIC showed how it had mustered sufficient clout to receive sweeteners under a new Citi deal involving the United States government — but not without meeting with fresh risks.
.
In a move aimed at bolstering Citi’s capital base to win back market favour, the US government and several big investors will convert their preferred shares into common stock at US$3.25 apiece. For GIC, that’s a huge discount to the price of US$26.35 it would have had to pay for the conversion under the original terms of its January 2008 investment.
.
As a result, GIC’s stake will be about11 per cent — making it Citi’s No 2 shareholder after the US government raised its stake to 36 per cent from 8 per cent — without having to fork out extra cash. That is significantly higher than the 4-per-cent stake that GIC had first secured in what was once the world’s biggest financial institution.
.
“Due to the challenging economic climate, the profitability of US banks is likely to be impaired in the next two years,”GIC group chief investment officer Ng Kok Song said on Friday night. “Adequate capitalisation will help cushion against larger-than-expected losses, should they occur.”
.
At the same time, the new deal appears to have reduced GIC’s paper losses.
.
According to sources familiar with the transaction, GIC has an unrealised loss of about US$5.5 billion ($55,000,000,000.00), as its preferred shares are now worth a mere US$1.4 billion in the market. With the conversion, GIC would be holding common stock valued at about US$5.2 billion, based on Thursday’s closing price of US$2.46 per share. This translates to a paper loss of about US$1.68 billion.
.
But on the flip side, GIC will no longer be a preferred shareholder entitled to an annual dividend of 7 per cent — a relatively attractive rate given the jittery environment.
.
Citi said on Friday it would suspend its dividend programme. Should a liquidation occur, common stockholders will be last in line.
.
Also, the Singapore sovereign wealth fund will have to watch its investment swing with the gyrations in the stock market. A year ago, Citi’s stock was trading above US$20. Last week, it crashed to below US$2, a level not seen in 18 years.
.
GIC’s Mr Ng is looking long-term. The latest move, he said, would “enable Citigroup to exploit the earning power of its unique business franchise when the world economy recovers”.
.
Some market analysts frowned on the US government’s unprecedented decision to become the biggest shareholder of an American bank. “We’re talking about a form of nationalisation, and to the extent that the market is going to accept it,” Mr Peter Kenny, managing director of Knight Equity Markets in New Jersey, told the BBC.
.
The early-morning news out of New York caused financial stocks to fall, as investors fretted over which other banks might see similar action, which would dilute current shareholders.
.
How Citi will evolve as a corporate animal under major government ownership is a hot topic. Already, the bank is overhauling its board so it will have a majority of new independent directors, Citi said on Friday.
.
“It’s just unbelievable,” Mr David Rovelli, managing director of US equity trading at Canaccord Adams told Bloomberg.
.
He added: “The government is making up the rules as they go. A continued breakup is probably in the cards.”
.
Citi is declaring it is business as usual. “The transaction does not change Citi’s strategy, operations or governance,” the bank’s chief Vikram Pandit said on Friday.