DealZone

Ambiguity in Action

USA/Former AIG CEO Hank Greenberg has had plenty of nasty things to say about what he sees as government mismanagement of his once mighty empire. AIG’s slash-and-burn asset sales are finding only tepid interest in a global market struggling to keep its head above water. Michael Flaherty reports that only three potential bidders are still interested in a large stake in AIG’s $20 billion Asian life insurance unit, with the auction heading into its final week and hopes for a sale fading fast.

This should worry Citigroup shareholders concerned about the government’s intentions toward the bank. Reports are surfacing that Citi may sell its Japanese investment bank and brokerage as it looks to raise more cash from a sale of global assets. Having been taken to task for keeping the naming rights to the New York Mets’ new baseball park — something any big retail company might consider a reasonable marketing expense — Citi execs are reported scratching their heads, trying to figure out what hoops the government wants them to jump through. Markets hate uncertainty, so the current ambiguity about what Washington wants is particularly hard to stomach.

Like many a routine financial blog, DealZone has danced around the definition of nationalization. Reader Alan Macdonald argues we should refer to the process as “democratization.” Pundits are increasingly suggesting the process should be considered more a government receivership, which has a less onerous and deathly long-term tone than nationalization.

The Obama administration has resisted referring to what the government will do with the banks as nationalization. Addressing Congress last night, President Barack Obama said the goal of any government involvement in bailing out the financial sector must be to get lending going again. Presumably, he was not talking about the same lending market that supplied the financial amphetamines for the bubble that burst last year.

A few hours before Obama’s address, senators took taxpayer-funded Northern Trust to task over millions it spent at a golf tournament, so it’s obvious there are still a few political pounds of flesh to be rung out of the money industry. Perhaps the biggest problem facing the salvation of modern finance is the ambiguity of the political arena.

The Sum of All Fears

MARKETS-STOCKS/Many argue that U.S. banks need to be nationalized, perhaps temporarily, pointing to Sweden’s success in fixing its banking sector. But a growing group of experts is raising alarms, saying that any nationalization cure would be far worse than the banking crisis disease.

In today’s Wall Street Journal, William Isaac, who was chairman of the FDIC from 1981-1985, argues forcefully that nationalizing the biggest U.S. banks is not a viable option. He points out that Sweden is tiny compared with the United States and that the total nationalization effort there involved one bank that had already collapsed. He says that the problems at Citi, Bank of America and perhaps others are too big and difficult to be dealt with through drastic government intervention, particularly one labeled “nationalization.”

Dick Bove, a veteran bank analyst, also thinks government management is a mistake. Nationalized banks would not be dynamic enough to aid the economy in recovery, according to Bove. He also argues that the damage to shareholders would be catastrophic, though certainly in the case of Citigroup, shareholders have already taken most of the hit.

Stockholm Syndrome

BANKS/WHITEHOUSEThe dreaded nationalization of Citigroup may have been forestalled but is hardly gone. Weekend reports said the government would take a bigger share of the bank’s common stock, igniting an off-market really in its shares. The Wall Street Journal reported the government would own as much as 40 percent; it said Citi executives would like to hold the number closer to 25 percent. The bank and the state are talking. That’s clearly better than not talking, but hardly seems to justify the big run-up in Citi shares.

The Journal says a scenario on the table has much of the $45 billion in preferred shares the government holds in Citi, which amounts to a 7.8 percent stake in the bank, being converted into common stock. Never mind how hugely dilutive to existing shareholders this would be, and how much more say the government would have in how the bank operates. In any other circumstance (think back to the nationalization of AIG) these are strong sell signals. But so long as the commentary stays focused on forestalling an outright government takeover, Citi shareholders are becoming more encouraged to increase their exposure.

As we did on Friday, DealZone wonders at the process of softening up Americans to the idea of the state taking over the bank; ergo the title of this missive. Sweden, that Keyser Soze of socialism, is considered the modern home of successful bank nationalizations, and given the terror with which U.S. investors approach the idea of even temporary government administration of a major bank, the market’s interpretation of the weekend reports as cause for celebration can perhaps be best understood as hostage mentality.

Saab Story

GM/SAABIn its latest turnaround plan, General Motors made clear that its money-losing Swedish unit Saab would be independent within a year. Wasting no time, Saab said it would seek protection from creditors and restructure. Better to start with a clean slate.

Saab said it would seek funding from public and private sources through the reorganization, and that GM would provide liquidity.

On another front in the same war, talk of bank nationalization has been dragging down financial markets. Alan Greenspan is talking about it, giving even Republicans an excuse to support this most abhorrently socialist of measures. Even the dire and vague positions of Treasury Secretary Tim Geithner seem designed to ease Americans into accepting what would normally be unthinkable to a God-fearing capitalist.

Taking the Wall St bypass

THAILAND APECRemember early last year and the year before, when the U.S. financial system won huge investments from Asian sovereign wealth funds? Those investments seemed so rich at the time, offering conversions into shares at deep discounts and the kind of interest rates banks had demanded from subprime borrowers. The biggest fear anyone on Wall Street had was some vague sense that foreign ownership of U.S. financial institutions might be somehow un-American or a threat to national security.

Nobody talks about those days much anymore. Merrill Lynch, the recipient of billions of expensive sovereign wealth fund support, was swallowed up by Bank of America. Talk of nationalization swirls around Citigroup, another sovereign wealth fund investment target throughout the stunning collapse in its share price.

Our correspondent George Chen reports China’s $200 billion sovereign wealth fund, China Investment Corp, is shifting to natural resources, fixed income and real estate after taking big haircuts on the U.S. financial sector. The fund, headed by former Vice Finance Minister Lou Jiwei, “has drawn criticism at home over large paper losses on its combined $8.6 billion investments in U.S. private equity giant Blackstone Group and Wall Street bank Morgan Stanley,” Chen says, citing people familiar with the matter.

Plane talk

CitibankCiti scrapped plans to buy a $50 million corporate jet after it raised eyebrows all the way to the White House. Politicians called the order, which was made in 2005, wasteful. 

True, Citi has been propped up by taxpayers, swallowing up $45 billion of capital since October. Its market value is now only about $17 billion. And it has lost more than $28.5 billion in the last 15 months.

But how unusual is it for a company the size of Citi, once the world’s largest bank, to have a corporate jet? 

Evercore gets league table boost; Lazard left in the cold

Pfizer Inc’s $68 billion deal to buy Wyeth gave boutique investment banking firm Evercore Partners a huge jump in the rankings of merger advisers, while Lazard Ltd got left on the sidelines.

One mega-deal was enough to catapult Evercore, which advised Wyeth along with Morgan Stanley, into the list of Top 10 advisers. Evercore now stands at No. 7 for the global and U.S. rankings, up from No. 24 and No. 16 in 2008, according to data from Thomson Reuters.

Morgan Stanley stands at No. 2 globally with 15 deals, and No. 3 in the United States with 10 deals, according to Thomson Reuters.

Citi to keep Banamex

Citi logoCiti is keeping its Mexican banking unit Banamex. Sources told Reuters that Citi sees the Mexican bank as a solid business and has no plans to sell it.

In recent days, analysts and business columnists have speculated that leading businessmen in Mexico could be planning to buy Banamex as Citigroup tries to shed assets.

Telecommunications mogul Carlos Slim, the world’s second wealthiest man, was widely seen as a potential buyer, but his spokesman told Reuters on Friday that he was not in talks to acquire the bank.

Citi to sell assets. To whom?

Citigroup As Citi announced plans of a radical dismantling, CEO Vikram Pandit said he “will continue to look at all assets dispassionately.”

For some time to come, that might really be all that he can do when it comes to his plan to sell off non-core assets.

Citi said it will realign into two businesses, Citicorp and Citi Holdings, as it posted its fifth straight quarterly loss. Citicorp will focus on universal banking, the other on brokerage and retail asset management, local consumer finance, and a pool of assets that require special management.

Depression-era tactics

USA/As economists talk increasingly of recession morphing into depression, it seems only natural that a Troubled Asset Relief Program should be built into something more substantial than a ground-covering sheet of plastic. Enter the Good Bank/Bad Bank model. Many a Wall Street veteran will remember this approach as the answer to the S&L crisis in the 80s. Fewer will recall its use in the 30s when the banking sector toppled like a line of dominoes. And markets are rising this morning, with huge injections of government cash going into Bank of America, and Citigroup preparing for its big split of good and bad assets.

Citigroup’s broad restructuring plan announced this morning is of this tried and tested Good Bank/Bad Bank design. It came with a fresh $8.29 billion fourth-quarter loss, the bank’s fifth straight quarter in the red.

“The history of Good Bank/Bad Bank is surprisingly positive,” said Michael Holland, founder of fund manager Holland & Co. “It worked a couple of decades ago, so I think it’s one of the first steps toward some positive news and the end of this nightmare. We have for the first time in a long time some reason to think positively.”