ADIA vs Citigroup – the Battle Continues…

(September 26, 2013) — The largest Abu Dhabi sovereign wealth fund could be about to haul Citigroup back to court with further claims to recover some of the bank’s bailout, after its prior attempts were thwarted in March.

In a document unsealed in a New York court this week, Citigroup said that a claim filed in August by the Abu Dhabi Investment Authority (ADIA) had made an “assault” on a federal court ruling in March, Reuters reported.

The March ruling saw ADIA’s claim—and subsequent appeal—to recover $4 billon of the investment it made in the bank during the crisis refused.

Citi’s deposition said only after losing the battle for the $4 billion did ADIA discover it had further grievances against the bank. It is now seeking $2 billion for each claim against it, citing breach of contract and of the implied covenant of good faith and fair dealing.

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“ADIA’s new arbitration is nothing more than an improper attempt to litigate claims that ADIA knew about, could have brought, and in significant part did bring to light in the first arbitration,” Reuters cited from Citigroup’s lawsuit.

The bank is seeking an injunction against the new ADIA arbitration, which was filed last month with the American Arbitration Association. A week later, Citigroup filed a lawsuit against the fund, with ADIA moving this week to try and have the lawsuit dismissed claiming arbitrators, rather than a court, should hear the bank’s arguments.

The case has been on-going for several months.

ADIA initially claimed in late 2009 that its November 2007 investment of $7.5 billion into Citigroup was based on fraudulent statements by the US bank. At the time, Citigroup battled record losses tied to subprime mortgages. If the investment was unable to be canceled, the Abu Dhabi fund had sought $4 billion in damages. Meanwhile, the bank had asserted that the suit lacked merit, promising to “vigorously” defend itself.

(September 26, 2013) – Financial repression is forcing pension funds to look at smarter ways of measuring risk in order to take advantage of it, according to Allianz Global Investors.

Arun Ratra, head of global solutions at the fund manager, told reporters that pension funds were starting to look at asset liability management (ALM) in more depth as the depressed interest rate environment forced them to seek out higher yields.

Speaking ahead of the Allianz-Oxford Pensions Conference, he said: “The first step to take is to really understand what this financial repression environment means for pension funds, for funding levels, and how it affects the corporate liabilities.

“To just de-risk now is not the smartest thing to do. You should start by looking at your balance sheet more holistically. Now, we need to revisit ALM modelling, devising a more robust asset allocation, and creating a platform for performance.”

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This, he continued, means looking at newer asset classes and strategies, paying more attention to portfolio construction, and making better use of the risk budget available.

“It’s about a dynamic risk management regime which takes the pro-cyclical profits and locks them in, while taking positions on anti-cyclical risks on the portfolio.”

Financial repression is the name given to policy decisions implemented by governments and central banks to artificially depress interest rates in order to encourage growth.

The effects are being seen across the world—as an example, Germany has seen its real interest rates falling into negative territory for the first time ever.

The knock-on results are depressed bond yields and increased liabilities. Stakeholders argue this negatively impacts on corporates, which struggle to keep on top of their pension liabilities, discouraging spending on growth.

Institutional investing during a period such as this is challenging, but it is forcing trustees and CIOs to consider dynamic asset allocation strategies in order to take advantage of the risk premia on offer, according to Allianz Global Investors.

The fund manager laid out a four-point plan to achieve what it calls “Smart Risk”: increasing allocation to risky assets; adding uncorrelated sources of sustainable alpha; increasing diversification and; dynamically managing risk to reduce losses while taking advantage of upside potential.