Selling Junk

Citigroup Inc. and Merrill Lynch & Co., two of the largest financial institutions in the U.S., turned to outside investors for a second time in two months to replenish capital eroded by subprime-mortgage losses.

Citigroup, the biggest U.S. bank, is getting $14.5 billion from investors including the governments of Singapore and Kuwait, former Chairman Sanford Weill and Saudi Prince Alwaleed bin Talal, the New York-based company said today in a statement. Merrill, the largest brokerage, will receive $6.6 billion from a group led by Tokyo-based Mizuho Financial Group Inc., the Kuwait Investment Authority and the Korean Investment Corp.

Wall Street banks have raised $59 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from the declining values of mortgage-related assets. Citigroup was propped up in November by a $7.5 billion investment from the Abu Dhabi Investment Authority. New York-based Merrill was helped by a $5.6 billion cash infusion last month from Singapore's Temasek Holdings Pte. and U.S. fund manager Davis Selected Advisors LP.

``The only reason the banks are raising capital from the Middle East and Asia is because those are the only people who have the excess capital to lend,'' said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management, which holds shares of Citigroup and Merrill.

Citigroup declined $2.30 to $26.76, and Merrill fell $2.47 to $53.50 at 3:16 p.m. in New York Stock Exchange composite trading.

Tier 1 Capital

Writedowns have reduced Citigroup's Tier 1 capital ratio, which regulators monitor to assess a bank's ability to absorb loan losses. Without new capital, the ratio would fall to about 7 percent, Goldman Sachs Group Inc. analyst William Tanona estimated last month, compared with the 6 percent needed to maintain ``well-capitalized'' status from federal regulators. Today's capital increase will put the Tier 1 ratio at 8.2 percent, said Citigroup, which has a 7.5 percent target.

``The company going into this announcement was in an extremely precarious capital position,'' Oppenheimer & Co. analyst Meredith Whitney said in a Bloomberg TV interview. ``They're shaking down the global money tree and basically raising money from any source they can.''

Morgan Stanley, UBS AG, Merrill Lynch & Co. and Bear Stearns Cos. also reached out to sovereign wealth funds or state-controlled investment authorities in Asia for money after bad investments depressed profits. The investments don't give the sources of new capital any extra say in the management of the companies, such as board seats.

Capital Cost

``It does show that investors aren't completely ignoring the sector,'' said Peter Plaut, a senior credit analyst at Sanno Point Capital Management, a hedge fund based in New York. ``They are putting in capital but it's at a cost. Now it's up to the CEOs to be able to generate returns that exceed that cost of capital.''

The Kuwait Investment Authority, which invested in both Merrill and Citigroup, was formed by the Middle East's fourth- biggest oil producing country in the 1980s to manage the nation's wealth. Kuwait may have as much as $250 billion of assets, compared with about $875 billion for the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, according to an estimate by Morgan Stanley analyst Stephen Jen.

The Government of Singapore Investment Corp. invested almost $7 billion in Citigroup convertible preferred securities and said in a statement today that it will own about 4 percent of the bank if the securities are turned into shares.

Dividend Yields

With a 4 percent stake, Alwaleed has been Citigroup's biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of capital.

Singapore and Alwaleed, along with Los Angeles-based Capital Group Cos., the biggest U.S. manager of stock and bond mutual funds, Kuwait, the New Jersey Division of Investment and Weill, will receive a 7 percent annual dividend from the investment in Citigroup.

Merrill's convertible securities will pay a 9 percent annual dividend until they automatically turn into Merrill shares in 2 3/4 years. Citigroup can force conversion into shares after five years if the stock price more than doubles. When converted, the shares will dilute the existing shareholders' stakes.

Citigroup will pay $875 million a year in dividends to the new shareholders. Merrill Lynch will distribute $594 million annually.

Asian Cash Boosted

Record oil prices have led to windfall profits for the six countries of the Gulf Cooperation Council, who own around 40 percent of the world's proven oil reserves. Chinese and other Asian countries have amassed foreign currency reserves partly through surging exports to the U.S. The U.S. trade deficit widened 9.3 percent in November, the most in two years, the Commerce Department said last week.

``It is a testament to the weakness of the dollar that foreign governments and banks see this as a relatively inexpensive way to buy into a major US financial institution,'' said Anthony Sabino, a business law professor at St. John's University in New York.

Foreign investors whose stakes rise about 10 percent trigger a review by the U.S. Committee on Foreign Investment, which examines whether acquisitions by overseas buyers compromise national security.

U.S. Securities and Exchange Commission Chairman Christopher Cox said in December that the growth of state-run investment funds may lead to an increase in political corruption because governments might abuse the funds' leverage over markets and companies.

`Hand-wringing'

While there may be ``hand-wringing'' in Washington over the investments, there won't be an attempt to tighten rules on foreign investors, said Todd Malan, executive director of the Organization for International Investment.

``Congress realizes that we need this investment,'' said Malan, whose Washington-based group represents 141 non-U.S. companies investing in the country.