Transcripts

The Abu Dhabi Infusion Pumps Up Citi & The Stock Market

SUSIE GHARIB: A big overseas investment in Citigroup restored investor confidence on Wall Street today. The Dow surged 215 points and the NASDAQ jumped nearly 40. Even battered Citi shares rose almost 2 percent after a Middle Eastern investment firm agreed to invest billions of dollars in the struggling financial services giant. Scott Gurvey has more on why Citi and other American assets look attractive to international investors.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big cash transfusion for Citi was the trigger and a rebound for the battered financial sector was the result. The Abu Dhabi investment authority is paying $7.5 billion for Citi bonds yielding 11 percent. The bonds can be converted into a nearly 5 percent equity stake. Several analysts today warned that Citi will still have to raise funds by selling assets or cutting its 7 percent dividend. Meredith Whitney of CIBC World Markets says the Citi board is not doing shareholders any favors. Citi is a client of CIBC.

MEREDITH WHITNEY, BANKING ANALYST, CIBC WORLD MARKETS: The board, who masterminded -- and I use that term highly sarcastically -- this 11 percent borrowing rate to pay 7 percent, have not dealt with the fact that what would be better for shareholders would be a break up of the company. Unfortunately, the company is severely undercapitalized, but you`re going to have to sell key assets to shore up capital levels. Otherwise, you`ll have a death spiral of the share price.

GURVEY: There is also the possibility that Abu Dhabi will invest additional funds. Currently, Citi`s biggest shareholder is Saudi Arabian Prince Alwaleed, who made his first investment in the company in 1991. He added to his stake over the years and currently owns 3.6 percent. Most foreign investors stick to U.S. Treasury securities. But they are increasingly looking to diversify their portfolios into other assets, including equities and currencies. Economists say there is nothing inherently wrong with foreign investment. They say the funds are put to productive use and represent confidence in American assets. But Bob Hormats of Goldman Sachs warns there will be a problem if foreigners take their money elsewhere.

ROBERT HORMATS, VICE CHAIRMAN, GOLDMAN SACHS: The negative side is that we have such a low savings rate in this country that we depend so heavily on foreign capital and if, as a result of financial problems in this country or a sharp decline in the dollar or some other traumatic event, foreign capital were to slow down dramatically, that would be of even bigger concern to American policy makers.

GURVEY: Net foreign investment in the United States now totals $3 billion a day. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.