Kuwait Sovereign Fund May Boost Citi, Merrill Stakes (Update2)

By Jesse Westbrook and Peter Cook

May 1 (Bloomberg) -- Kuwait's $250 billion sovereign wealth fund may boost its stakes in Citigroup Inc. and Merrill Lynch & Co. as it pursues investments in companies battered by subprime- mortgage related losses.

``The valuation in the markets in the U.S. and Europe, we think, has created a lot of opportunities,'' Bader al-Saad, the Kuwait Investment Authority's managing director, said in an interview with Bloomberg Television today. ``We have confidence in the management'' of Citigroup and Merrill, he said. Shares of both companies rose in New York trading.

The KIA in January bought a $3 billion stake in Citigroup and invested $2 billion in Merrill to help replenish capital at the companies after they suffered writedowns on mortgages, bonds and loans. Banks and securities firms have absorbed more than $300 billion of losses since the collapse of the subprime- mortgage crisis set off a global credit contraction.

Al-Saad said his fund also purchased a 5 percent stake in Related Cos., a closely held residential property developer based in New York. The KIA moved away from pursuing investments in developing nations last year to focus on financial and real estate companies in the U.S. and Europe, al-Saad said.

``This is a temporary shift,'' he said.

Stock Sale

Citigroup, the biggest U.S. bank by assets, sold $4.5 billion of stock this week after reporting its second straight quarterly loss. The New York-based company has recorded more than $40 billion of credit losses and writedowns since last year.

The share sale ``will strengthen their capital base, which is very important.'' al-Saad said. ``I hope it's enough.''

Citigroup rose $1.04, or 4.2 percent, to $25.99 in New York Stock Exchange composite trading. New York-based Merrill, the third-biggest U.S. securities firm by market value, climbed $2.56, or 5.1 percent, to $52.39.

Al-Saad said he's concerned about the threat of recession in the U.S. and predicted the nation's economic recovery will ``take longer than everybody expected.'' While China and India won't fall into recession, their growth will slow due to the situation in the U.S., he said.

``Asia will continue to be attractive,'' al-Saad said. ``Vietnam will be more attractive than the others.''

The number of sovereign wealth funds, which foreign governments control, has surged as Asian nations and oil exporters in the Middle East seek greater returns on their currency reserves by investing in companies. Morgan Stanley estimates the funds' assets may increase fourfold to $12 trillion by 2015.

Congressional Scrutiny

The growth of sovereign funds and their investments in the world's biggest banks and securities firms has drawn scrutiny from U.S. lawmakers and European Union officials.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said at an April 24 hearing that balancing firms' capital needs with potential threats that sovereign funds pose to national security ``will require continued vigilance.''

EU leaders in March said governments should have the authority to bar funds from investing in strategic industries such as defense.

``I see no basis'' for ``worries about KIA in particular or about the sovereign wealth funds,'' al-Saad said. ``Can anybody give me an example that there is wrongdoing?''

The International Monetary Fund is drafting voluntary guidelines to urge sovereign funds to show their investments aren't driven by political motives. Funds would also be encouraged to disclose more details about their holdings and investment strategies.

Al-Saad said his fund will likely agree to the IMF guidelines.

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Peter Cook in Washington at pcook6@bloomberg.net.

Last Updated: May 1, 2008 16:57 EDT

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