Citigroup's New Investor: $7.5B From Abu Dhabi

I suppose the big news yesterday was generally considered to be Abu Dhabi's sovereign fund investment in Citigroup. For $7.5B, the country's investment fund bought just shy of 5% of America's largest commercial bank.

Are we all quaking in our boots yet over foreign government takeover of our financial system?

As if.

My good friend and sometimes business partner, B, opines that perhaps the investment is calculated to insulate the Arabs by making our American interests coincident with theirs. By owning a significant stake in Citi, according to B, we can't punish Abu Dhabi without harming our own largest commercial bank.

Maybe. Maybe not.

How about this for a rationale?

The US dollar is currently under pressure. Its value has slipped enough in the past year to cause oil producers to consider diversifying their assets out of dollars. US Treasuries' yield has become anemic as their price is bid up during the current credit quality turbulence.

Citigroup hasn't outperformed the S&P500 over five years. In fact, its current price level has pretty much returned to zero over the period. Its dividend thus becomes its return. From CNBC this morning, I believe this to be around 7%.

Thus, by buying into a large US commercial bank, Abu Dhabi has done something fairly clever.

First, they will likely receive a return greater than that of the US dollar. Because Citi is the largest US commercial bank, the Arabs know that it's unlikely to fail without a rescue by the Fed and/or Treasury.

Second, as an equity, it has an embedded call that Treasuries don't. So the Abu Dhabians will get a dividend, plus possible equity appreciation, with some protection on the downside for free.

Third, as B noted, they invest in something important to the American financial system. So, like a virus in a body, any truly toxic action against the virus might hurt the body, too. The US government is unlikely to punish Citi for having a foreign minority equity investor. Even if, with the Saudi Prince, the two Arab interests own up to nearly 10% of the bank.

Parenthetically, you can pretty much dismiss idiotic Senator Chuck Schumer's grandstanding on this issue. Sure, his ego is soaring into the stratosphere at having been courted prior to the announcement. But most of his faux-warnings about the Arabs wanting board seats of confidential information via Citigroup's various financial network dealings are bogus. No outside board members would receive that sort of sensitive information- foreign, or not. With US public company board membership being the joke that it has become, nobody would realistically worry about this alleged risk.

All in all, it's a smart move. The Arabs probably realize that they bring nothing to the table by requesting a board seat. It would only upset Americans more than any benefit the investors would receive.

This way, they get better exposure to the US equity markets and economy, but with some protection. And it's an implicitly friendly, positive signal to US markets. If anything, the Abu Dhabians have sacrificed total return in exchange for safety, given their own domicile, and the furor they know they might arouse with investments seen to be spread among too many top-performing US large-cap companies.