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Sovereign Wealth Funds Have Big Paydays From Crisis

Eric Dash|The New York Times
Monday, 7 Dec 2009 | 9:57 AM ET

The white knights that came to the rescue of banks during the financial crisis are going home, with their pockets full of bounty from their good deeds.

Financial Crisis
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Financial Crisis

In less than two years, many of the biggest overseas government investment funds, known as sovereign wealth funds, have reaped huge gains from bailing out financial institutions, and in turn, the global financial system.

In the latest announcement, Kuwait’s sovereign wealth fund said on Sunday that it had booked a $1.1 billion profit on the stake it took in Citigroup in January 2008. That equals a 37 percent annualized return on its initial $3 billion investment. Other sovereign wealth funds — including those backed by the governments of Singapore, Qatar and Abu Dhabi — have also recently cashed out stakes in foreign banks for comparably large gains.

The hefty returns highlight how some savvy government funds have been able to profit from the financial crisis, even as most ordinary investors have been pummeled by billions of dollars of losses. It also calls into question whether such funds will act as long-term investors, as many initially suggested, or merely short-term profiteers.

Many sovereign funds invested in the early days of the crisis as banks scrambled to find investors willing to plow in money and exacted lucrative terms. (Swings through Asia and the Middle East were so common that bankers coined the phrase “Shanghai, Mumbai, Dubai, Goodbye” to describe their fund-raising tours.)

But as financial stocks continued to plummet last year, the so-called smart money supplied by foreign governments no longer looked so sure. Now, as bank shares have rebounded faster than most analysts had projected and governments face internal political pressure at home, the funds are racing to lock in gains.

“They didn’t panic into selling at the bottom of the market,” said Mohamed El-Erian, chief of Pimco. “And now they can sell.”

GIC, an investment arm of Singapore’s government, said in September that it turned a $1.6 billion profit by selling about half of its stake in Citigroup.

In June, the International Petroleum Investment Company, which is wholly owned by the Abu Dhabi government, said it would sell a big part of its investment in the British bank Barclays, making a profit of roughly £2 billion on a £2 billion investment. In October, the Qatar sovereign wealth fund said it was selling a part of its stake in Barclays, also at a healthy profit.

Mr. El-Erian said data was limited on the specifics of how the big sovereign wealth funds have fared through the crisis. Norway, one of the few such funds that provides regular data and has invested in financial firms through its general financial investments, has reported that it is having a strong year.

The great unraveling by foreign governments may put additional pressure on the United States government to begin exiting its bank investments, too.

Bank of America said last week that it expected permission from regulators to soon repay the $45 billion in taxpayer money it received. Citigroup, in which the government holds $20 billion of preferred shares and nearly a 34 percent ownership stake, has made paying back the government a priority but has not reached a deal with the Treasury Department for repayment.

Of course, not every bank investment has been a winner. The China Investment Corporation saw its $3 billion investment in the Blackstone Group turn south, especially after the firm’s initial public offering did not perform well.

Temasek Holdings, another sovereign wealth fund backed by the government of Singapore, replaced its leadership team and overhauled its investment strategy after big bets on Barclays and Merrill Lynch did not pan out. The Abu Dhabi Investment Authority has had a similar experience with its early investment in Citigroup.

Still, the decision by the Kuwait Investment Authority to sell its stake in Citigroup came as somewhat of a surprise. It invested about $3 billion in Citigroup in January 2008 alongside other prominent investors, including Adia, the GIC, the New Jersey Division of Investment, and Citigroup’s founder, Sanford I. Weill. Around the same time, the authority put $2 billion into Merrill Lynch, the troubled brokerage house taken over by Bank of America last year.

In September, the Kuwait Investment Authority said that it had no immediate plans to sell its investments in Citigroup or Bank of America because its financial strategy was based “on a long-term vision.”

The government investment fund had agreed to convert its preferred shares of Citigroup into common stock. But on Sunday, it announced that it had sold that stake for about $4.1 billion, producing the $1.1 billion gain.

Citigroup’s ordinary shareholders, however, have not fared as well during the last two years. The company’s stock was trading above $25 a share in January 2008 when Kuwait took its stake; it is now trading at about $4 a share.

Graham Bowley contributed reporting.

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