My Two Cents - "Sold in America"

11/30/2007

Turn on the evening news in most cities recently and you will see images of rows of homes, many for sale, many with foreclosure signs in the front yards. On weekends the tables come out and are strategically placed in the driveway heavily laden with the possessions of the soon-to-be-prior occupants of the home. These are selling off anything they can muster to scrape together rent for the next roof over their heads, the next car payment, or the next VISA bill. Most observers look at this and have at least a pang of pity or perhaps take a moment to be thankful for their good fortune.

Somehow though, when you put this wholesale liquidation into the terms of our country as a whole, the reaction turns from one of pity and contrite thankfulness to one of pure excitement and adrenalin. Earlier this week, we got news that Citigroup, the biggest bank in the US in terms of assets was receiving a much-needed $7.5 Billion infusion of cash from the Abu Dhabi Investment Authority (ADIA). That cash will not come for free though as ADIA will receive convertible stock yielding 11% annually. The deal will result in the ADIA owning not more than 4.9% of Citigroup. Between ADIA and Saudi Prince Walid bin Talal, they will now own nearly 10% of our biggest bank.

Anyone see a problem here? Why is it that Citigroup can pay ADIA (who also happens to be a client) a return of 11% annually, while their common shareholders are only entitled to around half that? There are a number of possible conclusions that may be drawn from these facts.

First, Citigroup was desperate; more so than anyone can imagine.

Second, ADIA recognizes that a fall in the value of the dollar diminishes the purchasing power of their dollar holdings and is looking for ways to be compensated.  Numerous reports stated that one of the main drivers behind the decision to make the investment is the recent fall in the dollar. Foreigners, sitting on trillions of dollars are scrambling to find suitable investment vehicles to cover the loss of purchasing power the dollar's fall has caused.

Third, foreign investors have been and continue to realize that their chances of getting paid back with actual products are slim and figure they'll simply buy the cow instead of waiting for the milk. More than likely, it is a combination of all three.

Predictably, Wall Street reacted positively with the news of the deal touching off a two-day 500 point rise in the DOW Jones Industrial Average. I must be a royal party pooper, but I don't see anything good coming of this. This certainly isn't the first time foreigners have bought a stake in American companies. Recent deals include:

- French telecommunications equipment maker Alcatel’s $13.4 billion takeover of Lucent,
- The U.K’s National Grid buyout of New York’s KeySpan for $11.8 billion,
- Saudi Basic Industries’ $11.6 billion purchase of GE Plastics,
- At the beginning of November, Canada’s Toronto-Dominion Bank announced an $8.5 billion deal to acquire Commerce Bank,
- In May, China spent $3 billion for a 10-percent equity stake in New York's Blackstone Group,

- During September, Blackstone’s competitor, Carlyle Group, sold a 7.5 percent stake to the government of Abu Dhabi for $1.35 billion,

- Also in September, the government of Dubai agreed to purchase 20 percent of NASDAQ.

As a country, we are now akin to the family whose home has been foreclosed on. We are liquidating assets to make good on prior debts. While some will argue that this inflow of capital is a good thing and has been going on for many years, what I feel they fail to recognize is the pattern of acceleration in our debt accumulation and therefore the acceleration in the sell-off of American property, companies, resources, and other assets to cover the difference.  This is another one of the drawbacks to the falling dollar that you will not hear about on the evening news. And yes, unlike popular opinion and the general consensus, it is a drawback.

In typical fashion, the mainstream press is presenting a rather one-sided view of the Abu Dhabi story and the underlying fundamentals. The contention is that we have them over a barrel because they can't just exit the dollar. They would lose too much wealth in the process. While this might be somewhat true in the very short term, the real consequence is that eventually the title for the United States of America will be in the hands of foreigners. Who will have who over the barrel then?  In a high stakes drag race much like the show 'Pinks', we are trying to beat a Lamborghini with a tricycle.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.