(Hat tip Margo I)REVIEW & OUTLOOKCiti of Arabia
Abu Dhabi takes Manhattan–and Washington, too?

Thursday, November 29, 2007 12:01 a.m.


Investors seem delighted that Abu Dhabi is injecting $7.5 billion into Citigroup, bidding up stocks in general on new confidence that the mortgage solvency crisis might ease. We hate to spoil the party, but it strikes us as unfortunate, if not a tragedy, that America’s largest bank had to go hat in hand to Arab sheiks because of bad management and blundering U.S. monetary policy. The Citi play is being spun as a master-stroke by Robert Rubin, the chairman of the bank’s executive committee. The bank gets a capital infusion without having to cut its dividend, and gives up only a minority stake while Abu Dhabi gets no seat on the board. Even better from a political point of view, Abu Dhabi will be able to convert shares for no more than a 4.9% stake, which comes in just below the 5% level that requires approval by the Federal Reserve. Mr. Rubin even seems to have greased the skids on Capitol Hill, with New York Senator Chuck Schumer already forgetting his campaign against Dubai Ports World.

Citigroup did have to shore up its balance sheet, and we suppose petrodollars are a better source of capital than U.S. taxpayers under a “too big to fail” doctrine. On the other hand, where were Mr. Rubin and the bank board when Citi was betting so much on subprime? Given the 11% the bank is paying Abu Dhabi, Citigroup’s other equity holders might also be better off down the road had they taken a dividend cut instead.

Most important, no one should be under any illusions that Abu Dhabi’s investment is a normal commercial transaction. It comes from a sovereign wealth fund controlled by a foreign government, which has political as much as business interests; from an Arab government that has a troubling history with American banking laws; and it offers a Middle Eastern entree into the U.S. financial system that since 9/11 plays a pivotal role in the war on terror.

Readers of these columns might recall in particular Abu Dhabi’s adventures in Beltway banking. It was Sheik Zayed, the father of the current ruler of Abu Dhabi, who owned the infamous Bank of Credit and Commerce International, or BCCI, whose fraudulent tentacles spanned the globe, including the highest levels of Washington politics a decade and a half ago.

The current emir, Sheik Khalifa bin Zayed al Nahyan, is not his father–who always maintained that he was a victim of the BCCI fraud himself. And Robert Morgenthau, the Manhattan District Attorney who investigated BCCI, tells us that Abu Dhabi “has been responsible” since BCCI.

On the other hand, the bank was forced to settle for hundreds of millions of dollars after lying to evade American banking laws. Mr. Morgenthau also recounted that the elder Sheik Zayed once called to inform the State Department that, if Mr. Morgenthau indicted anyone in the royal family over the scandal, he would pull his billions out of the U.S. and make no further investments here.

Mr. Morgenthau says this message was passed to him via the Justice Department. His reply: “Tell them that you don’t control that cranky S.O.B. in New York.” As a long-time New York DA, Mr. Morgenthau could stand up to such political pressure the way the Justice Department might not. In certain corners of the world, large investments come with political expectations.

Perhaps the Abu Dhabi of today has moved beyond such threats. The United Arab Emirates have helped us in the war on terror, and the U.S. is the ultimate defense for the oil-rich emirates on the edge of the Arabian peninsula. One can argue that investments like Abu Dhabi’s draw both sides more closely to each other, and so are mutually beneficial.

Yet everyone should also admit that this investment means that Arab interests will now have inordinate sway over America’s largest bank. Abu Dhabi’s 4.9% stake combined with the 3.9% stake of Saudi Prince Alwaleed bin Talal makes them the bank’s dominant shareholders, and who knows how many other smaller holdings are in Middle Eastern hands. The small Gulf states may be governed separately from Saudi Arabia, but they are closely linked by geography, family ties, and national interests. For purposes of political influence, they often behave as part of the same tribe.

In that regard, the 4.9% gambit looks all the more troubling as a way to avoid Fed scrutiny. If the investors’ motives are merely commercial, why go to such lengths? The wire-transfer system is crucial in the war on terror, and at a minimum the Fed and U.S. Treasury need to know that Citigroup will continue to cooperate in sanctions against terror states and tracking terror financing. Citigroup’s enforcement unit should be given a thorough scrubbing.

Speaking of the Fed, no one should forget that its monetary mistakes helped to make possible Citi of Arabia. Its easy money policy this decade created a subsidy for debt that led to the housing bubble and Citi’s mistakes in the mortgage and SIV markets. It also fed a global commodity boom that has enriched the oil producers and other countries that have a low propensity for domestic consumption. Their petrodollar windfall has to go somewhere, and so it is gobbling up U.S. assets. This recycling may help Citigroup now, but it has also weakened American influence more broadly as the dollar has continued to decline. And it left Abu Dhabi better positioned than American finance companies to rescue Citigroup.

No one favors open capital markets more than we do, and foreign investment is a crucial part of American economic success. But since 9/11, commercial calculations must also consider national security. We’d feel better if this deal were inspected by U.S. officials, and we especially agree with Mr. Morgenthau when he says, “It’s a sad day for American financial markets when you’ve got to turn to Abu Dhabi to get bailed out.”

Copyright © 2007 Dow Jones & Company, Inc. All Rights Reserved.




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