Citigroup’s dance with Dubai

While the American economy sank, Citigroup put US taxpayer money to work helping to sustain the Dubai bubble.  In December 2008, just weeks after Citigroup needed a second government bailout on top of the $25 billion it received through TARP, the bank made an $8 billion loan to Dubai.  It is believed to have $1.9 billion in exposure currently.

One year before the bank’s loan to Dubai, in November 2007, Citi and Robert Rubin were being congratulated by Wall Street for securing a 4.9% investment from Abu Dhabi (the capital of the UAE). Some saw through the buzz:

Investors seem delighted that Abu Dhabi is injecting $7.5 billion into Citigroup, bidding up stocks in general on new confidence that the mortgage solvency crisis might ease. We hate to spoil the party, but it strikes us as unfortunate, if not a tragedy, that America’s largest bank had to go hat in hand to Arab sheiks because of bad management and blundering U.S. monetary policy.

The Citi play is being spun as a master-stroke by Robert Rubin, the chairman of the bank’s executive committee.

Abu Dhabi stepped in at a crucial moment for Citi, then saw much of its investment vanish. Though their stake was carefully designed to avoid regulatory scrutiny (coming in at just below 5%), they clearly had no small amount of leverage over Citi.

Was Citigroup returning the favor to the UAE by lending to Dubai last year?

It’s hard to say. The relationship between the two cities is complex. Right now, oil-rich Abu Dhabi is generally expected to step in and support Dubai, and there is speculation that Dubai went public with its news in order to force Abu Dhabi’s hand.

Moody’s was issuing warnings that Abu Dhabi would have to support Dubai two months before Citi’s loan, in October 2008. The ratings agency was also warning Abu Dhabi not to take “selective action” in Dubai two months after the Citi loan, in February 2009. Two weeks later, Abu Dhabi shored up Dubai with a $10 billion bond purchase.

Abu Dhabi was the largest shareholder in Citigroup before the US taxpayers arrived on the scene; it’s certainly hard to believe that the two were not acting in tandem to support Dubai.

How did Citigroup develop such strong ties to the UAE? One clue: Rubin’s old boss, Bill Clinton, is known to have very close ties to the United Arab Emirates.

Clinton was business partners with Dubai ruler Sheikh Mohammed (along with Ron Burkle); he advised Dubai on the controversial 2006 ports deal; the Clinton Global Initiative received support from both Sheikh Mohammed and Abu Dhabi; and he frequently speaks to audiences in the UAE (at $300,000 a pop) — in fact, he spoke to a students in Dubai in early November, just three weeks before the Dubai World announcement (Hillary Clinton, meanwhile, was in Abu Dhabi).

I imagine he was there for more than just a speech.