Citigroup, Merrill & Foreign Investors

It's a lot to ask of one person to make two brilliant, on-air comments in two consecutive days. But in my opinion, that's what Rick Santelli has delivered, yesterday and today.

His rejoinder to Jim Cramer on CNBC yesterday, described here, won my further respect for this straight-talking Chicago-born former futures trader and executive.

This morning, he actually topped yesterday's performance. And, in the process, publicly echoed my own beliefs about the foreign sovereign fund bailouts of Citigroup and Merrill Lynch.

The context was, as usual, CNBC's on-airhead 'senior economic report' Steve Liesman's remarks. He was prattling about the US financial system being saved by foreign capital, asking where were the well-capitalized US investors?

Santelli, without missing a beat, asked how the investments of those foreign sovereign funds in Merrill and Citigroup had fared so far? Liesman admitted they had not done well.

Santelli retorted with a simple, smirking,

"I rest my case."

In this recent post, I argued that, among the reasons for the Abu Dhabi investment in Citigroup, total return wasn't one of them. I was being charitable. I also wrote this, in which I was much less charitable.

A week or so ago, again, on CNBC, when someone asked Treasury Secretary Hank Paulson if sovereign fund investors were dumb to buy American financial services firms' equities, Paulson necessarily, astutely replied with something like,

"I would never say that anyone who invests capital in the US is dumb. We welcome foreign investment in our economy."

Well spoken, Hank. We do welcome investors.

That doesn't mean they are all smart.

Santelli continued this morning's remarks by noting that Warren Buffett seemed preoccupied with other matters, and wasn't rushing into positions in Citigroup or Merrill.

At this, Liesman muttered something about sovereign fund time horizons and different objectives.

However, most investors like to make consistently positive returns. 'Buy, hold, lose for a while, and hope to eventually make it back,' is usually a recipe for an investment manager who wants to get fired.

As I noted in this recent post, investment banking doesn't really seem all that attractive, as a sector. Neither does commercial banking, as I've written numerous times in recent months, such as here and here,

"Personally, I think these foreign investors are making a common mistake- buying damaged firms at the bottom, and hoping they will turn around. Were they to have a basket of such bets, that might be a good, risk-adjusted bet.

Somehow, though, I suspect that they are taking outsized, non-diversified bets that won't do as well, on a risk-adjusted basis, as alternatives such as US index funds or buying shares in Goldman or Lehman. Or, over the next few years, perhaps even Blackstone."

No, the dirtly little secret, to which Rick Santelli gave voice, is that these overseas investors have, in all probability, mistakenly bought into faded marquee names in American finance. Those names haven't been stellar, consistently superior performers very often, if ever, in the recent decade.

It would take the typically clueless Steve Liesman to ask why savvy hedge funds aren't buying into loss-making, crippled financial service has-beens like Citigroup and Merrill Lynch. Buying either one right now is a fairly concentrated turnaround bet. Maybe John Thain will do well with Merrill over time, but right now, an investor could probably do better elsewhere.

As a side note, Liesman also chose to debate veteran asset manager Mike Holland on an investing point this week on CNBC. I don't recall the exact issue, but Holland made a lot of sense, in the calm, thoughtful manner that is his hallmark. He's a long-experienced, successful money manager.

Liesman jumped on Holland's comment and said something like,

'I have to differ with you, Mike.'

It would have been funny, had it not simply been so pathetic. Liesman isn't even an economist, much less one of any note. He's a journeyman journalist cum TV 'economic reporter.'

Thank you, Rick Santelli, for a simple, direct observation on why you don't see American hedge funds rushing into shares of the two crippled US financial service leviathans.