The Wall Street Journal-20080115-The Morning Brief- The New Foreign Funds For Merrill and Citigroup- Online edition
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The Morning Brief: The New Foreign Funds For Merrill and Citigroup; Online edition
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Wall Street's scramble for foreign funds to shore up the big banks' books continues, with Merrill Lynch this morning announcing $6.6 billion in new investments and Citigroup $12.5 billion -- both relying heavily on cash from Asia and the Middle East.
Merrill said it is issuing convertible, preferred stock as a long- term investment to Korean Investment Corporation, Kuwait Investment Authority, and Mizuho Corporate Bank of Japan. "One of my main priorities over the last several weeks has been to ensure Merrill Lynch's balance sheet is strong, and these transactions make certain that Merrill Lynch is well-capitalized," said John Thain, the former New York Stock Exchange chief picked to lead Merrill last fall as the brokerage giant was reeling from bad bets on mortgage-backed securities. The financial breakdown among the three new investors wasn't immediately clear.
Citigroup's move to get back on what newly installed Chief Executive Vikram Pandit called "our 'front foot'" was bigger in scale and broader in action. Citi's new funds include $6.88 billion from the Government of Singapore Investment Corporation, and money from Capital Research Global Investors; Capital World Investors; the Kuwait Investment Authority; the New Jersey Division of Investment; Prince Alwaleed bin Talal of Saudi Arabia, who's already a big Citi stockholder; and former Citi Chairman and CEO Sanford Weill. After months of saying it wouldn't cut its quarterly dividend, Citi is also doing just that, to 32 cents a share from 54 cents. Citi's investment news came amid its release of quarterly financial results that Mr. Pandit called "clearly unacceptable." Citi posted a net loss of $9.83 billion, or $1.99 per share, on revenue of $7.22 billion -- results that reflected $18.1 billion in write-downs and higher credit costs blamed on Citi's exposure to investments derived from subprime- mortgages. Citi also said that burgeoning losses related to consumer loans had raised its credit costs in the U.S. by $4.1 billion.
A source notably missing from Citi's new list of benefactors was the China Development Bank, a state-owned institution previously expected to invest in Citi that was apparently pulled back by the government. It isn't clear why Beijing nixed the deal, but The Wall Street Journal notes how much political flak such investments by sovereign-wealth funds have been catching in the West, as well as uncertainty about how much bigger the U.S. banks' subprime-related losses can grow. In another announcement today with a much lower profile, the Dubai government-controlled investment firm Istithmar said the political backlash in the U.S. and Europe was too harsh for its tastes, and that it was considering investments in China.
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Moody's Gets Warier of Private Equity
Moody's Investors Service today plans to warn "it will adopt a tougher stance when rating companies owned by private-equity groups that were more "aggressive" in the most recent deal-making cycle," the Financial Times reports. The decision by Moody's, which like other ratings agencies has been criticized for not taking a more critical look at mortgaged-backed securities and investments derived from those securities, could make it harder for private-equity firms to raise cash when some lenders have become more risk-adverse. Moody's has ranked the buy-out groups by their habit of taking cash dividends out of their U.S. investments since 2002 -- a controversial practice that let the private-equity owners make quick profits and lower their own risks, even as it put some portfolio companies in a tougher situation, the FT notes. "The interesting aspect is finding out which firms support their companies and which firms don't," John Rogers, senior vice-president at Moody's corporate finance, tells the paper. "At the start of the next up cycle, we will be much more cautious in how we rate these firms."
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Oh, and About Those High Oil Prices . . .
President Bush today said he complained to his Saudi hosts about the toll high oil prices are taking on the U.S. economy, and he wasn't the only one to air petro-grievances today. The Bank of Japan, in downgrading its expectations for the Japanese economy, in part blamed the rise in prices of crude oil. Haruhiko Kuroda, president of the Asian Development Bank, tells the Financial Times that the bank will be downgrading its next regional forecasts because of the slowing U.S. economy -- which is likely to buy fewer Asian products -- and higher fuel prices. And then Mr. Bush, talking to Saudi entrepreneurs gathered at the American Embassy, said he broached the subject with King Abdullah ahead of OPEC's big meeting on Feb. 1. "Oil prices are very high, which is tough on our economy," the president said. "I would hope, as OPEC considers different production levels, that they understand that if their . . . one of their biggest consumers' economy suffers, it will mean less purchases, less oil and gas sold."
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Senate Probes Efforts to Sidestep Dividend Taxes
Senate investigators are examining whether some securities firms and banks improperly structured transactions that helped hedge funds avoid dividend taxes, the Wall Street Journal reports, citing people familiar with the situation. Citigroup, Lehman Brothers, Morgan Stanley and UBS have received subpoenas seeking information about derivatives trades where offshore-investment vehicles enter into "swap" arrangements -- selling stocks to investment banks which, in return, pay the clients the return of the stocks and any dividends they generate. "The transactions can help hedge funds save paying as much as 30% in taxes on U.S. stock dividends because the offshore fund technically doesn't hold the stock," the Journal notes, adding that accountants estimate that more than $1 billion in withholding taxes is at stake. "If the government ultimately determines that withholding taxes should have been paid, it will likely seek to recoup the money -- plus interest and possible penalties -- from the banks, who are the withholding agents."
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Also of Note. . .
Washington Post: A long-awaited final report from the Food and Drug Administration concludes that foods from healthy cloned animals and their offspring are as safe as those from ordinary animals, effectively removing the last U.S. regulatory barrier to the marketing of meat and milk from cloned cattle, pigs and goats. The 968-page "final risk assessment," not yet released, finds no evidence to support opponents' concerns that food from clones may harbor hidden risks, but recognizing that a majority of consumers are wary of food from clones -- and that cloning could undermine the wholesome image of American milk and meat -- the agency report includes hundreds of pages of raw data so that others can see how it came to its conclusions.
New York Times: Federal authorities expect to identify and deport more than 200,000 immigrants this year who are convicted criminals serving time in prisons and jails across the country, the country's top federal immigration enforcement official said. The effort to speed the deportation of foreign-born criminals is part of a campaign by the Immigration and Customs Enforcement agency to help federal and state prisons reduce the costs of housing immigrants, Julie L. Myers, assistant secretary of homeland security and head of the agency, said in an interview.
Guardian: Senior British police officials are talking to the FBI about an international database to hunt for major criminals and terrorists. The U.S.-initiated program, "Server in the Sky," would take cooperation between the police forces way beyond the current faxing of fingerprints across the Atlantic. Allies in the "war against terror" -- the U.S., U.K., Australia, Canada and New Zealand -- have formed a working group to address the sharing of biometric measurements, irises or palm prints as well as fingerprints, and other personal information.
BBC: Japanese officials have carried out exercises to see whether a Patriot missile-defense shield could be deployed in Tokyo to protect the capital from an attack by North Korea or from elsewhere.
International Herald Tribune: After the briefest of truces, Europe's antitrust regulator resumed its battle with Microsoft, opening two new investigations into claims that the largest software maker had abused its dominant position to squeeze competitors out of the market. The commission will examine whether the bundling of Internet Explorer into Microsoft Windows has unfairly excluded competitors from the market, including a small Norwegian company called Opera, and it will also investigate whether Microsoft withheld essential information from companies that wanted to make products compatible with its ubiquitous software, including Office word processing and spreadsheet programs.
Financial Times: European states are gearing up for a rearguard action against the EU's green-energy plan, just months after many of them signed up to placing the European Union at the forefront of the fight against climate change. Just days before the European Commission is to unveil its detailed country-by-country targets for cutting emissions, leaders are already privately battling to water down proposals they fear will damage their economies.
USA Today: A controversial trial of the popular and costly cholesterol-lowering drug Vytorin showed that it offered no benefit over an older drug available in generic form, Merck and Schering- Plough said. The results come from a study that pitted Vytorin, a drug duo made of Zetia and Zocor, against Zocor alone, and it is likely to fuel the debate over the companies' handling of Vytorin and its sister drug Zetia, which together generate more than $5 billion in sales each year.
Wall Street Journal: Delta Air Lines has opened merger negotiations with both UAL's United Airlines and Northwest Airlines, and hopes to negotiate a merger agreement with one of the airlines over the next two weeks, according to people familiar with the situation.
Los Angeles Times: MySpace says it can't guarantee that the people who sign up for its social networking site aren't underage or sex offenders, but it averted a potential legal battle by agreeing to keep trying. A group of 49 state attorneys general probing safety issues at the News Corp. unit and other online social networks signed a deal with MySpace, which promised to help organize an industry task force to find tools for verifying the identities and ages of people online.
Bloomberg: International Business Machines, the world's biggest computer-services company, posted earnings and sales that topped analysts' projections as orders from Asia and Europe bolstered results. The strong results overseas eased concern that slowing economic growth in the U.S. will drag down technology company profits and marked a reversal from the previous quarter, when IBM disappointed investors with slack hardware sales.
Variety: With optimism steadily growing that the Directors Guild of America is heading toward a tentative deal with the Alliance of Motion Picture and Television Producers, and strike fatigue growing among members of the Writers Guild, the hope on the picket lines is that the DGA's gains will be sufficient for writers to embrace the idea of forging a similar pact to end the 11-week-old strike. Meanwhile, citing fallout from the strike, Warner Brothers TV, CBS Paramount Network TV, Universal Media Studios and 20th Century Fox TV followed the lead of ABC Studios and began dropping writers and producers from their rosters -- a move that costs writers potentially tens of millions of dollars in lost paydays.
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Quote of the Day
"According to our calculations and our timelines, we think that from the first quarter of 2009 until 2012 we will be able to take full control of the internal affairs of the country," Iraqi Defense Minister Abdul Qadir tells the New York Times about his government's estimates for when it can assume responsibility for security in the country. His projections were even less optimistic than those he made last year, the Times notes. And Baghdad expects it will need U.S. protection from external threats for longer than that. "In regard to the borders, regarding protection from any external threats, our calculation appears that we are not going to be able to answer to any external threats until 2018 to 2020."
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David Marcelis contributed to this column.
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Write to Joseph Schuman at [email protected]
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