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Sovereign funds lose out after bank bail-out
Tuesday, 24 February 2009 12:55pm

The US government's move to potentially have direct share ownership in the banks bailed out during last year's crisis could dilute the returns of sovereign wealth funds and pensions funds that hold stake in US finance stocks.

This week the US government, in concert with the Federal Reserve and other related agencies, announced that it would put the major US banks, such as Citi and Bank of America, through an evaluation test that would assess whether they needed additional capital buffer.

But unlike the existing bail-out plan where the government acquired non-voting preferred shares with guaranteed dividend payments, the next round of capital injection could involve common shares with voting rights.

Aite Group senior analyst Denise Valentine said that the Government of Singapore Investment Corp. (GIC) could face a dilemma if banks such as Citi, believed to be in discussion with US officials on such a deal, become part-owned by the government through the direct share ownership.

"SWFs investing in Citi have watched their investment go from very bad to much worse. US government ownership of the bank will influence Citi's strategy in the future and a conversion of preferred shares to common shares will dilute the SWF's share," she said.

She added, "SWFs may have already mentally written off their investment. SWF investors will likely hold their 7 per cent preferred bond as the prospect of stock ownership for a $2 per share company selling off assets is not good."

But it is not only the GIC that stands to lose out. The nationalisation of the US banking sector will have its knock-on effect on the valuation of global finance stocks and consequently, the returns of pension funds and other sovereign funds invested in the sector.

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