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2007-11-29

Abu Dhabi Becomes Largest Citigroup Shareholder with $7.5B Investment, Bailout Comes Amidst Subprime Mortgage Crisis, Record-High Oil Prices

Guests

Nouriel Roubini, Professor of Economics at New York University. He was an economic adviser under the Clinton administration and maintains the widely-read Global Economics Monitor website. He was among the first economists to predict the housing slump and now warns that a severe US recession is "inevitable."

Michael Klare, Professor of Peace and World Security Studies at Hampshire College. He is author of several books including "Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum." Klare’s latest article for the Nation is called Beyond the Age of Petroleum.

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The Gulf Arab emirate of Abu Dhabi bought a $7.5 billion stake in Citigroup, America’s largest bank, on Tuesday, making it the bank’s largest shareholder. As the U.S. credit crisis worsens and the price of oil hovers close to $100 a barrel, the injection of capital from oil-rich Gulf states is seen as a bailout of banks in trouble. We speak with NYU economics professor, Nouriel Roubini, and Hampshire College professor, Michael Klare, author of "Blood and Oil." [includes rush transcript]

Transcript

This is a rush transcript. Copy may not be in its final form.

JUAN GONZALEZ: The Gulf Arab emirate of Abu Dhabi bought a $7.5 billion stake in Citigroup, America’s largest bank, on Tuesday. Abu Dhabi is now Citigroup’s largest shareholder, surpassing Saudi Prince Alwaleed bin Talal, who bought his shares during the mortgage crisis in 1991.

As the credit crisis in the US worsens and the price of oil hovers close to $100 a barrel, the injection of capital from oil-rich Gulf states is seen as a bailout of banks in trouble.

New York Senator Charles Schumer welcomed the Citigroup transaction, saying it will "help preserve New York’s status as the world’s financial center." Last year, Schumer was staunchly opposed to the takeover of US port operations by a company from Dubai.

The declining US dollar came up at the OPEC meeting in Saudi Arabia earlier this month. Iranian President Mahmoud Ahmadinejad called the dollar "a worthless piece of paper." Venezuelan President Hugo Chavez said the dollar was in free-fall and that OPEC should stop trading oil in dollars. He also warned against a possible US attack on Iran.

    PRESIDENT HUGO CHAVEZ: [translated] Somebody was asking me a few days ago in Santiago, Chile, about the threats to Iran and Venezuela, and I said, “Well, if the United States is crazy enough to invade Iran or aggress Venezuela once again, then the price of a barrel of oil will not be $100, but maybe $200. We need stability. We need peace.

AMY GOODMAN: But it’s not just Iranian and Venezuelan leaders who are noticing the declining power of the dollar. The November 17 edition of The Economist warned that the United States "may well be heading for recession." Lawrence Summers, the former Treasury Secretary under President Clinton, former president of Harvard, also indicated a recession is likely, in a Financial Times article on Monday.

To discuss the state of the US economy today, we’re joined by two guests. Nouriel Roubini is with us. He’s a professor of economics at New York University, an economic adviser under the Clinton administration, and maintains the widely read Global Economics Monitor website. He was among the first economists to predict the housing slump and now warns a severe US recession is “inevitable.” Michael Klare is with us, as well. He is a professor of peace and world security studies at Hampshire College, author of a number of books, including Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum. His latest article in The Nation is called “Beyond the Age of Petroleum."

We welcome you both to Democracy Now! Michael Klare, let’s begin with you. The declining dollar, Abu Dhabi getting now 4% of Citibank.

MICHAEL KLARE: Well, you know, oil and everything else is so closely linked, and one thing that’s happened in the past year is that there’s been a huge increase in demand for imported oil, some of that coming from the United States, because we haven’t been able to curb our demand, a huge increase in demand from China and India. They pay for that in dollars. As a result, the Middle Eastern oil countries have accumulated a massive, a colossal hoard of petrodollars. They are, as you’ve been saying, diminishing in value. These countries are trying to unload their hoard of dollars by buying pricey investments, like Citibank and a whole host of other things, and to try to use that to get real property, a distinct from hoards of petrodollars of declining value.

JUAN GONZALEZ: And the degree of control now that Abu Dhabi might have over Citibank?

MICHAEL KLARE: Well, that’s hard for me to say. The financial pages have reported they have begun to use that influence to determine the control of the company and to determine policy. This is not my area of expertise, but I get the sense that the oil countries, the dominant oil countries — Russia, Venezuela, the Middle Eastern countries — increasingly are using their oil wealth to shape international politics. And we have certainly seen that in Venezuela and Russia, and here we’re seeing it with economic power in Abu Dhabi.

AMY GOODMAN: Professor Roubini, your response to this?

NOURIEL ROUBINI: Certainly, it’s a very difficult moment for the US economy. We are on the verge, I view, of a recession, because we have now the worst housing crisis and recession in US history. We have now these oil prices close to $100 a barrel. We have a severe credit crunch now in the economy. And the US consumer is on the ropes, because it has negative savings and is that burdened. And on top of it now, we have these problems coming from abroad from the financing of our very large current account deficit. So this is a very difficult moment.

JUAN GONZALEZ: And, Professor, the Citicorp’s crisis obviously developed as it began continually restating the amount of losses that it was incurring as a result of the subprime crisis. Your reaction to these enormous restatements, not only of Citicorp, but of Merrill Lynch, of some of these major, major American financial institutions?

NOURIEL ROUBINI: Yes, so far, these financial institutions have acknowledged only $50 billion of losses, but a variety of analysts in the private sector have really suggested that subprime losses alone are going to be something like of the order of $300 to $400 billion. On top of it now, you have significant delinquencies in near-prime and prime and, soon enough, auto loans and credit cards and commercial real estate are going to go into default. And, soon enough, even corporate sector firms are going to default. Therefore, a wide estimate of what these losses may eventually be is closer to $1 trillion, I would say, so we’re very, very far from acknowledging, and these firms are catching up in admitting, the size of the losses.

JUAN GONZALEZ: And in terms of the — how could they be so off in their estimation of their exposure? Do you suspect, as what happened with the Enron situation and WorldCom a few years ago, that there’s actually been some illegal activity going on, in terms of how they have been maintaining their financial records in regards to some of these exposures?

NOURIEL ROUBINI: I don’t know about illegal activity, but certainly there was a whole system of reckless and predatory lending in the situation of subprime mortgages, and they lent aggressively to people who could not afford, and now the default rates on these subprime mortgages are going through the roof, therefore some of these losses were unexpected. And some of it was also that until now, they were essentially not marking to market, but marking to a theoretical mode or to a fake rating the value of these assets, since the grading agencies were also part of this scheme of essentially providing very high ratings on packages of mortgages that were actually worth much less, and therefore now they’re forced now by new regulation also to recognize the fact that these things are not worth a hundred cents on the dollar, but ninety or eighty or seventy or even less.

AMY GOODMAN: And how oil plays into this?

NOURIEL ROUBINI: Oil plays into this in the sense that we are, first of all, an oil importer country. In the last few US recessions – ’73, ’74, ’79, 1990 — a major oil shock was one of the important causes of recession. This time around, again, we have oil going from before the Iraq war, $30 per barrel, to now close to $100 per barrel. And secondly, of course, from the financing point of view, as was pointed out by the other author, the petrodollars are being recycled. And until recently, these countries were happy to hold just low-yielding US T-Bills at 3%, 4%, 5%. Now they’re realizing that if they have to finance the United States, they’d rather buy our own kind of gems and assets, equity. Therefore, there was last year this conflict on Dubai ports essentially taking control of US ports. This time around, you have now Abu Dhabi buying a fraction of Citigroup.

AMY GOODMAN: You don’t have as much attention being paid to this, to the buying of Citigroup. By the way, Citigroup, the possibility of something between 17,000 and 45,000 job layoffs in the next months.

NOURIEL ROUBINI: Yes, you know, Citigroup has massive losses, and they’re going to fire a very, very large number of people across the world. In the case of this investment, we have to consider the fact this is only a minority investment, so they don’t have a board seat, they don’t have a significant control. When Dubai port wanted to buy the US ports, it would have been full control of that particular [inaudible]. So it’s a minority investment. It certainly gives some influence for Abu Dhabi for within the business of Citigroup.

JUAN GONZALEZ: Michael Klare, I’d like to ask you — going back to the oil situation — clearly, there have been world oil crises in the past, in terms of the run-up of prices, but there seems to — appears to me to somewhat of a distinction this time in that the major countries with the hugest, largest oil reserves — Iran, Iraq, Venezuela — are also countries now where there are real political upheaval and enormous contradictions between those governments and the United States, and how that plays out in terms of the oil crisis affecting the US.

MICHAEL KLARE: Well, there’s a lot going on all at once that ensures that this oil crisis is qualitatively different from those of the past. And this is much more long-lasting. And one of the qualitative differences is that we have used up, over the past thirty years, most of the remaining oil in the global north — in the United States, in Canada, in Europe and other places that are near at hand and relatively under our control. Most of the world’s remaining oil is in the global south, often in countries that were under imperial rule, that have been invaded in the past by the imperial powers or the United States. And they bear the legacies of colonialism and past invasions. And so, there’s a history of animosity. That’s where most of the world’s remaining oil is left. So it’s not surprising that all of these countries — you could throw in Venezuela, Nigeria, Kazakhstan — have an inherent capacity for turmoil. And we’re going to see one crisis after another after another for the remainder of the petroleum age, and that’s going to produce continuing spikes in prices like we have today.

AMY GOODMAN: On the issue of oil and war, how does the Iraq war play into this, Michael Klare?

MICHAEL KLARE: Well, it has a direct impact on Iraq, because Iraq is the world’s second-largest owner of oil reserves. And if Iraq were a stable, functioning country, Iraq could be providing three, four times as much oil as it is today. Obviously, it’s none of those things. It’s a country ripped apart by war and internal conflict, and I can’t imagine that’s going to change anytime soon. So Iraq’s potential oil is off the market.

But on top of that, Iraq has become an engine for instability and chaos and competition throughout the entire region. And that makes everybody jittery, makes people worried about the possibility of more wars in the region. And that’s probably the principal reason why oil prices are so high today. And on top of that, Amy, you have the lurking fear of US air strikes or who-knows-what against Iran looming over the horizon. And I think that’s contributed to the higher prices of oil today.

AMY GOODMAN: Finally, in our next segment, we’re going to talk more about the mortgage crisis, but the former CEO of Citibank, Charles Prince, resigned November 4, the same day Citi said it may write off this quarter $11 billion of assets linked to subprime mortgages. Your last comment, Professor Roubini, on the link between what’s happening at not only Citibank, but with these banks and the mortgage crisis.

NOURIEL ROUBINI: Certainly, we’ve had, you know, the most severe mortgage crisis in US history. We had also a crisis in the ’80s with the S&L boom and bust. This is a much bigger problem. You know, the amount of lending that was done in the last few years to people who could not afford was a magnitude larger that this case, and therefore now we are viewing the severe consequences of a bust and the worst housing recession in US history. Home prices may fall as much as 20%, 25%. So — and that’s going to be one of the important trigger of an economy-wide recession, with large increases in employment rates. So that’s the danger we’re facing now.

AMY GOODMAN: Professor Roubini, I want to thank you very much for being with us. Professor Nouriel Roubini is a professor of economics at NYU, former economic adviser to the Clinton administration, cofounder of the widely read Global Economic Monitor website. We’ll link to his. And Michael Klare, a professor at Hampshire College, has written many books, including Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum.

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