Should Middle East Funds Own U.S. Banks?

July 18, 2008— -- Rising defaults on home loans led Citigroup to post a $2.5 billion loss today, but the earnings report still beat Wall Street expectations and shares for the company were expected to advance to today.

As Citi reported its results, a Saudi prince was likely playing close attention. The nation's biggest banking firm counts as one of its top stakeholders Prince Alwaleed bin Talal.

As of last year, the prince owned more than $3 billion in Citigroup shares through his company, Kingdom Holding Company. In January, he was one of eight investors to buy a total of $12.5 billion in Citigroup securities.

The prince's interest in U.S. bank investments is nothing new — he began investing in Citi in 1991 — but this year, as banks scrambled for capital, several Middle Eastern funds have followed bin Talal's lead with sizeable investments of their own in American financial firms … and that makes some Americans uneasy.

"Americans should be able to have ownership of their country and not depend on international resources to bail them out," said Stephanie Weeks, a New York resident and a customer of Citigroup-owned Citibank.

Is Weeks right to be upset? It depends on who you ask: Experts disagree about the benefits and risks of foreign investment in U.S. banks, particularly when it comes to investment from Middle Eastern states that, thanks to ever-growing oil revenues, have money to burn.

The Middle Eastern funds have "money is coming out of their ears because oil prices [have been] at $140 dollars a barrel," said Desmond Lachman, a critic of sovereign wealth funds and a fellow at the American Enterprise Institute, a conservative think tank. "These people have huge amounts of reserves and they want to invest them more profitably."

While bin Talal's fund is private, much of the debate revolves around sovereign wealth funds — funds that invest money on behalf of a country.

In November, United Arab Emirates' Abu Dhabi Investment Authority invested $7.5 billion in Citigroup.

In January, Kuwait's fund, the Kuwait Investment Authority, and the Singapore Investment Corporation were among the investors in the $12.5 billion Citi deal.

The same month, Merrill Lynch raised money from the Kuwait Investment Authority as part of a $6.6 billion preferred stock deal that also included South Korea's Korea Investment Corporation.