A little more than two years ago, the largest sovereign wealth fund in the Middle East made a big investment in Citigroup – Abu Dhabi Investment Authority bought $7.5 billion of mandatory convertible securities that at the time seemed like a great deal. ADIA, as it is known, would be paid an 11% dividend for about 2 1/2 years and it would be required in March of next year to buy Citigroup stock for $31.83 a share.
With Citigroup stock around $3.50 a share today, the deal will cost ADIA dearly. So, it has filed a complaint (we are still trying to find out with whom) alleging “fraudulent misrepresentations” and wants the deal scrapped.
Unless it can be proven that Citigroup did engage in fraudulent activity (which would have huge ramifications beyond Abu Dhabi, one would have to believe), there is no reason for this deal to be torn up.
Clearly, Abu Dhabi understood investing in Citigroup carried risk. For starters, it was getting paid an 11% dividend which was meant to buffer some of the risk in the possibility Citigroup’s stock price could fall. Back in November 2007 when the deal was struck, the Federal Reserve was quoting AAA corporate bonds as measured by a Moody’s index of offering an average yield of 5.41%. The Fed had Baa corporate bonds at 6.37%. So that 11% tell me the lender understood that risk analysis was part of the investment decision.
People make bad investment decisions every day and many times, they are caused by events they don’t control. Citigroup played a role in the financial crisis. As did many other financial firms around the world. Abu Dhabi got caught in a badly timed investment.
It reminds this blogger of an example of the shoe being on another foot – about 22 years ago when the British government was in the process of privatizing British Petroleum. In September 1987, the British government struck a deal with investment banks here and in Europe to sell $12 billion of BP stock to the public.
BP’s American Depositary Shares traded around $74 or so when England and the banks struck a deal for the banks to buy the stock from the government at the equivalent of about $66 – a discount was built in because of the sheer size of the offering and also to help protect the banks in the event of a dip in BP’s stock from the time they agreed to buy it from the government and when the subscription period ended to the public weeks later.
And then came the October 1987 stock market crash. BP’s shares, like those of every other company, did more than dip – they tumbled. At one point, they were down to around $55. That meant a huge built in loss for underwriters stuck holding the stock. Goldman Sachs, Morgan Stanley, Salomon Brothers and Shearson Lehman Brothers. The four American banks pleaded with then Chancellor of the Exchequer Nigel Lawson to let them out of the deal because it would costs them millions of dollars and could lead to small banks in the underwriting syndicate to go belly up. The compromise was for the government to put a floor on how much the banks could lose but it essentially said: we are all big boys, you could smell juicy profits one day and when faced with losses, you cried for help. No deal.
And that should be the case with Abu Dhabi. No deal unless there is some real “fraudulent misrepresentation” that could be proven. If there had been “fraudulent misrepresentation,” one would think the U.S. government would have rooted it out while pumping billions of dollars into Citigroup.