The Wall Street Journal-20080123-Government Funds Take a Beating- Moves Into Financials Now Appear Too Early As Shares Keep Falling
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HONG KONG -- Were they early to the party?
Sinking share prices highlight a question: Did the Asian and Middle Eastern government investment funds that snapped up stakes in the world's great multinational banks buy in too soon?
The stream of global cash flowing from state-owned funds into U.S. and European financial giants over the past half year has yielded disappointing returns.
Investments in British bank Barclays PLC by Chinese and Singaporean funds are down around 36%. The stake that China Investment Corp., or CIC, took in Blackstone Group before the U.S. private-equity firm's initial public offering has shed about 36% of its value. The Government of Singapore Investment Corp.'s investment in the Swiss bank UBS AG has dropped about 23%.
Mideast investors have been burned, too. The Abu Dhabi Investment Authority, which invests that Persian Gulf emirate's excess oil wealth, paid some $7.5 billion for just under 5% of Citigroup Inc. in late November. Abu Dhabi, one of the United Arab Emirates seven emirates, received attractive terms, including convertible stock with a fat yield.
That helps ease the pain from the sharp drop in Citigroup's share price -- to $24.40 in New York Stock Exchange composite trading yesterday, down five cents for the day and 19% from the $29.80 close the day before the deal was announced. When the Kuwait Investment Authority injected $3 billion into Citigroup and $2 billion into Merrill Lynch & Co. earlier this month, it made a point to say it was investing for the long haul. That is echoed by other Mideast government investors, and so far no one is complaining publicly. But the short-term losses -- amid worry that a global recession may drag down oil prices -- may eventually raise concerns among officials.
The dropping values illustrate how hard it can be to pick a market bottom. It also suggests the government-owned investors, however sophisticated, aren't necessarily the smart money that small investors should emulate during a time of uncertainty about further write-downs and a potential U.S. recession.
The funds that ponied up for these bank stakes are focused on raising their long-term returns on foreign-currency holdings. They are hoping their new stakes will overcome the sharp share declines rooted in the U.S. subprime-mortgage crisis and return to the long-term growth trend that made them attractive in the first place.
Just last week, fragile balance sheets led Citigroup and Merrill Lynch to go back to a group of foreign investors to raise a combined $19.1 billion to replenish their depleted capital.
Among the biggest sovereign investors in Western banks are two from Singapore -- Temasek Holdings Pte. Ltd. and GIC, as the Government of Singapore Investment Corp. is known.
"There will be some downside risks. It is up to GIC and Temasek to assess this risk and decide if it's acceptable. Their responsibility is to accept prudent risks in order to earn good returns on their overall portfolio," Finance Minister Tharman Shanmugaratnam told Singapore's Parliament Monday in response to a legislator's question about the investments, according to the Associated Press. Mr. Tharman said he felt the two funds had "assessed the proposals rigorously."
In the Middle East, these investments haven't been controversial yet. Even in Kuwait, where members of Parliament relish raking government agencies and ministers over the coals for management blunders, there hasn't yet been a public outcry.
But in Beijing, criticism of government investments has been acute. Earlier this month, senior leaders vetoed a plan for state-owned China Development Bank to put roughly $2 billion into Citigroup in that latest round of financing. That follows the hefty share-price drop for Barclays since an investment by China Development Bank meant to help the British bank in its ultimately failed quest to buy Dutch bank ABN Amro Holding NV.
Citic Securities Co., a listed Chinese brokerage firm that operates under the umbrella of a wholly state-owned financial conglomerate, agreed in October to invest $1 billion in Wall Street's Bear Stearns Cos. Shares in Bear Stearns are down about 39% since. Bear is also investing $1 billion in Citic Securities, though over a much longer time.
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Jason Dean in Beijing contributed to this article.
