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Middle East's U.S. Bank Buys a Bust

NEW YORK (TheStreet) -- If Middle East sovereign financiers try to exit their investments in the U.S. financial sector any time soon, it won't be because of chaos in the streets of Cairo and Tripoli.

It will be because the investments weren't such a great idea after all.

Large U.S. banks went to sovereign wealth funds with hat in hand during the crisis. From 2007 to 2009, Wall Street sought tens of billions of dollars from Saudi Arabia, Abu Dhabi and Kuwait - as well as China and South Korea - hoping to shore up their balance sheets with those cash infusions.

But the investments have not yet yielded a profit and probably won't for some time.

For instance, Saudi Prince Al-Waleed bin Talal started investing in Citigroup (C) when it was first at the brink of bankruptcy in 1991. He invested more money into Citi in late-2008, boosting his stake to 5%, as the firm's stock price plunged from $35 to below $6 in less than a year.

Of course Al-Waleed's Kingdom Holding investment firm has reaped lots of dividend income through the years, and he doesn't seem eager to sell immediately. Yet Kingdom's stake was massively diluted after Citi converted $58 billion worth of preferred stock from the U.S. government and private investors into common shares last year. And since early 2009, Citi shares have failed to stay above $5 for more than a few days at a time.

In a less friendly situation, the Abu Dhabi Investment Authority filed an arbitration claim against Citi in 2009 alleging "fraudulent misrepresentations." ADIA had made a $7.5 billion investment two years earlier when the bank's subprime-related losses first came to light. The sovereign wealth fund received equity units that could be swapped into common stock at $31.83 to $37.24 a share - levels not likely to be reached any time soon.

Citi has denied ADIA's allegations and pledged to defend itself.

Sovereign wealth funds in China and South Korea that bought into Blackstone (BX) and Morgan Stanley (MS) haven't fared much better than their Middle Eastern counterparts: Blackstone is down 31% from the I.P.O. price on which the China Investment Corp.'s stake was based and Morgan Stanley, trading below $30, is far from the $50 level that CIC would need to make its $6.8 billion investment worthwhile.

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