New Jersey Fund Bets on Big Banks

Wall Street Journal
By IAN SALISBURY
January 15, 2008

JERSEY CITY, N.J. -- Humbled by the subprime mortgage crisis, Wall Street titans Citigroup Inc. and Merrill Lynch & Co. turned to a former Citi chief executive, a Saudi Prince ... and the school teachers of New Jersey.

Among the slate of far-flung investors who will pitch in more than $19 billion to the two struggling financial firms is the New Jersey Division of Investment, which oversees about $80 billion in pension assets for 700,000 current and former state employees, including police, firefighters and teachers.

New Jersey's investments -- $400 million in Citigroup and $300 million in Merrill Lynch -- are small compared with the $5 billion kicked in by the Kuwait Investment Authority.

The New Jersey fund may seem unglamorous next to the exotic cast of investors in the Wall Street firms, including former Citigroup Chief Sandy Weill and Saudi Arabian Prince Alwaleed Bin Talal. But the fund's lack of glamour may have helped it secure a slice of the investment.

Big petrodollar-driven deals with Gulf state investors have raised some hackles in Washington. Including the home state of Bruce Springsteen and Frank Sinatra in the banks' financing could help moderate some concerns about foreign investors, and even give the transaction a red-white-and-blue tint, says one person close to the deal.

At the same time, buying alongside deep-pocketed partners helped New Jersey get attractive terms.

"Whatever pricing power is, these people have it," says the source, referring to the overseas investors.

Susan Burrows Farber, chief administrative officer of the Division of Investment, agreed that New Jersey got attractive terms.

While she didn't rule out the notion of politics giving the state a helping hand, she says the deal came about because the two firms made known their need for capital at a time when New Jersey was reevaluating what it considered relatively slight investments in financial services companies.

"We sought these deals," she said. "It was a natural fit."

Like other state pension systems, New Jersey has sought to move investments beyond traditional fare like publicly traded stocks and bonds in an effort to diversify its holdings and boost returns.

The investments in Citigroup and Merrill Lynch are akin to stock investments, but they are more complicated because they represent stakes sold in specially negotiated "private placements" available only to a small number of qualified investors.

While the New Jersey Division of Investment says the financial service sector now offers an appealing long-term bet, it has run into trouble with risky investments in the past, particularly high-flying Internet stocks at the start of the decade. At one point between 2000 and 2002, the fund lost a third of its value and was criticized for "poor management" by then-Governor James E. McGreevey.

Among the criticisms: over-reliance for management on civil servants rather than Wall Street money managers, and an over-emphasis on equities.

In September 2002, hedge fund manager and prominent Democratic fund raiser Orin Kramer took over leadership of the council that oversees the fund, promising to hire outside money managers and invest in a broader range of assets.

The public pension fund posted a return in calendar 2007 of 9.2%.

Write to Ian Salisbury at ian.salisbury@dowjones.com