Translated material
Unplanned losses
Merrill Lynch and Citigroup seek salvation in the East
The beginning of the year brought grief to shareholders and managers of the largest American banks . According to Western media reports, the largest financial company Citigroup may write off assets worth up to $24 billion against the expected $8-11 billion, and investment bank Merrill Lynch may lose about $15 billion. In search of saving capital, financial giants turned to the Middle East. The Kuwait Investment Authority could invest several billion dollars in both companies. Previously, Citigroup was supported by a state corporation from the United Arab Emirates.At the end of last week, The New York Times wrote that the loss of Merrill Lynch could amount to $15 billion due to unsuccessful investments in the mortgage lending sector. This amount is approximately double the company's initial forecast. Wall Street analysts recently predicted a loss of $12 billion. In their opinion, a write-off of this size could significantly affect the investment bank's credit rating. Merrill Lynch is scheduled to announce losses on Thursday.
In December 2007, Merrill Lynch managed to attract investments worth $6.4 billion. These funds came from the Singapore government investment fund Temasek and the New York management company Davis Selected Advisors.
According to The New York Times, Merrill is currently in talks to raise about $4 billion with investors in the United States, Asia and the Middle East, including private American investment firms. The Financial Times reported yesterday that the Kuwait Investment Authority (KIA) could become one of Merrill Lynch's major investors. An official announcement about this is expected in the middle of this week.
If the deal goes through, KIA will have an important position in the emergency financing market for US investment firms. Previously, KIA pursued a very conservative policy. One of the reasons for the change in strategy was the global credit crisis, which created new opportunities to generate higher income through the purchase of affected assets.
According to The Financial Times, the Kuwaiti structure may also invest up to $2-3 billion in Citigroup. Previously, Citigroup was forced to write off approximately $6.5 billion in assets. In the third quarter, its profit fell by 57%. Against this background, in early November last year, the company's CEO, Charles Prince, was forced to resign. Vikram Pandit, who took his place, announced his intention to cut costs and sell assets in order to strengthen capital. He made it clear that the company's cost structure would be reviewed. Analysts believe that the new head of the company may sell assets and reduce the size of dividends.
On Sunday, CNBC reported on its website that Citigroup could write off up to $24 billion and lay off 20,000 employees. At the same time, analysts expected losses in the amount of 8-11 billion dollars. The official report on financial activities for the fourth quarter of 2007 is due out today.
To correct the capital situation, at the end of November, Citigroup agreed with the state corporation from the United Arab Emirates Abu Dhabi Investment Authority (ADIA) to sell a stake in its shares worth $7.5 billion. As a result of the transaction, ADIA became one of the largest shareholders of Citigroup with a stake of almost 5 % shares.
Citigroup shares fell at yesterday's opening on the NYSE by 0.4%, to $28.5, and Merrill Lynch shares by 0.35%, to $54.4.