Alwaleed backs Citi as break-up debate rages

04/10/2009 | Taimur Ahmad

Saudi prince weighs in as calls grow to split “too big to fail” banks

Citigroup’s largest individual investor, Prince Alwaleed bin Talal, has launched a vigorous defense of the firm and other institutions that are “too big to fail”, amid calls for systemically risky banks to be split up.

In an exclusive interview with Emerging Markets, Alwaleed, chairman of Saudi Arabia-based Kingdom Holding Company, said he was confident that the US administration and lawmakers would not seek to break up the nation’s biggest lenders.

“This idea of breaking up the big banks is not any longer on the table. Even if you break up one of the banks into two or three pieces, that bank is still going to represent hundreds of millions or billions of dollars,” he said.

“And any failure of a broken-up bank is still going to impact the whole system. You need to fix the problem, not a symptom of the problem.”

He said the problem of systemic risk could be eased “by having strong regulation, not to have this laissez-faire approach whereby the market will fine-tune itself. This has been proved wrong. The market can not and will not regulate itself.”

But he opposed breaking up banks. “Who will decide? Where do you draw the line?” Instead Alwaleed backed calls from US authorities to strengthen regulation, “to go beyond the limits of the requirements of Basle II.”

His comments came as calls grow for the government and regulators to dissolve “too big to fail” banks because of the systemic risk they pose. Former Federal Reserve chairman Alan Greenspan said that a way should be found “to make no institutions too big to fail”. He told a conference in Washington DC on Friday: “‘Too big to fail’ is a major problem.”

The Saudi billionaire also called on the US government to sell its stake in Citigroup as early as this year. “The earlier the US government exits its investments in those companies, the better,” he said, so long as any withdrawal happens in a way that will not “[negatively] impact the stock price of that company, be it Citigroup, Bank of America or any other company.”

He noted that “we need to give confidence back to the shareholders and investors that these companies are moving along without government support.”

Reducing the government’s involvement in Citigroup is a core objective of the bank’s senior management in their bid to return the bank to long term profitability after two years of losses.

Citigroup has received a total of $45 billion in capital from the US Treasury as well as a $306 billion loan-loss guarantee designed to cover 90% of losses on its most toxic loans.

Alwaleed said he expects the bank to return to operating profitability at the earliest next year. He said the right long-term capital structure for the bank would depend on regulatory requirements currently under consideration by US Congress.

“The intention is to so go beyond the limits of the requirements of Basle II. They would like to extend the scope – they cannot afford to have another crisis like that.”

Alwaleed upped his stake in the bank from 4% to 5% in November last year, at the height of the financial crisis. But the Saudi billionaire took a major hit last year as his investments in Citigroup and elsewhere plummeted. Citigroup shares have dropped 34% this year to about $4.52.

Alwaleed said the bank had learned its lessons. “Citigroup has learned a huge lesson [from the financial crisis]. The worst is behind them right now.” He cited the bank’s roughly $100 billion in tangible equity – “the highest in the industry” – as well as the scale of its operations in more than 100 countries, as evidence that the future is “very bright”.

But he warned: “If banks and regulators did not learn a lesson from this blunder of the century, then they will never learn.”

Kingdom Holding posted a net loss of nearly $8 billion in 2008, one of the largest corporate losses in Saudi’s history, but the conglomerate reported last month its investments for sale had risen by 75% since February. “We are long term investor, so [stock market volatility] does not really impact us much,” he said.

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