So Citigroup (C) has proposed that the US taxpayer and other preferred shareholders convert up to $75 billion of preferred stock into common stock, thus bolstering the company's tangible equity and putting it in less desperate need of a complete takeover.
And what will the US taxpayer get for this preferred stock conversion? 40% of the company for some of its $45 billion of preferred, say reports. The reports add that Citigroup's goal here is to keep the US's ownership under 50%, so this won't be a de facto nationalization.
Well, that's nice for Citigroup...and another ream-job for taxpayers.
Citigroup's common equity is currently worth $10 billion. If the US were to convert all $45 billion of its preferred at the current stock price, it should end up with 80% of the company, not 40%. If another $30 billion of preferreds converted, the US should end up with just over 50%.
For the US to convert $45 billion of preferred to common and only get 40% of the company, Citigroup's existing common equity would have to be valued at $65 billion, not $10 billion, and the conversion price would have to be about $10 a share. Or the US would only be able to convert $4 billion of its $45 billion, which wouldn't help Citigroup's tangible equity ratio much.
So is that what Citigroup is trying to do here? Persuade the US goverment to convert to common stock at a price miles above the current trading price, screwing the US taxpayer yet again?
Or does Citigroup have some other secret plan up its sleeve?
Please find the elephant in the room with this event process.
1) Government loans C money, backstops some obligations.
2) Certain government officials threaten to "nationalize" entire bank
3) Stock plummets
4) Government converts its loan to equity on new "fair market price"
This would be the most barbaric, manipulative death spiral financing in the history of the western world.
And you claim to be an advocate of free markets?
Please
I understand that "fear of nationalization" may be driving the stock down now--as it should. But that fear is based on the reality that nationalization is the best plan.
The taxpayers don't really deserve 80% of useless, expensive stock in Citi because we generally aren't at fault here. Billions wasted on propping up the dead won't bring them back to life and we'll still have the bills to pay later. The "investors" that were counting on government bailouts to save their worthless stocks will be laughing all the way to the bank. Without the expectation of a bailout Citi would already be at zero. In fact most large bank stocks are only being propped up at taxpayer expense via welfare for the rich.
Since it seems unlikely that Geithner, Summers and Bernanke are all morons a big question is why are they willing to do so much harm to the taxpayers. My guess is that 90% of Americans are against these deals. The other 10% don't have electricity and can't read.
You forget the preceding steps where the banks overcompensate their top employees, over-leverage their loans, creatively mismanage their business via things like unregulated CDOs and moved trillions to off-sheet mark-to-fantasy in order to keep their doors open. Where upon they ask for hundreds of billions in loans from the government in exchange for the worst parts of their toxic assets.
Free market means not having any government bailouts in order to keep individual businesses afloat. Not a hundred dollars and certainly not a trillion.
I am not defending the decision to loan them money in the first place. I am pointing out the incredibly dangerous precident set by allowing federal beauracrats to engage in "make it up as you go along" nationalization and wealth confiscation.
irony is that obama's turning out to be bush lite
The government isn't "confiscating" anything if the stock would have been worth zero without government involvement in the first place. The "wealth" of the shareholders would be nonexistent. It's not the government's job to prop up stockholders.
Welcome to socialism. You should have been voicing your concerns back in September and October of 2008 when everyone on Wall Street was demanding that the government needs to help out and save things. Funny thing about Pandora's box..
The value would have been zero without the government...your convenient "yeah i covered that in point #1" proves you don't much care about free markets anyway. Their "wealth confiscating" sounds like a guy whining because the cops took away the 72" flat panel he bought for $50 from the guys off that truck over there and he got nothing except a lesson.
all holders of their capital struture need to get crushed and managment all the way back to RUBIN have their assets seized
THIS WAS FRAUD
It's not ironic at all - it should have been expected. But actually to personify the matter is to miss the real point which is that governments, in general, and not just in the USA, will continue to use smoke and mirrors techniques to protect the financial technocracy and the culture of cronyism for as long as they can get away with it
I bet you think all FDIC seizures are "fascist" as are NCUA seizures and liquidations of credit unions.
you free market shills for years preached "Survival of the Fittest"
let's see if you really meant it
cowards
"Since it seems unlikely that Geithner, Summers and Bernanke are all morons a big question is why are they willing to do so much harm to the taxpayers."
Why? I'd like to to hear some thoughtful opinions on this from Henry or other posters. And why even bother converting if you're going to do it at some arbitrary rate pulled out of a hat?
I saw this press release for another $7 billion so I'm wondering if it's actually $52 billion
http://www.citigroup.com/citi/fin/data/fs090116a.pdf?ieNocache=868
Did the equity holders risk and lose? Sure. Do they deserve to be wiped out? Sure looks like it. Would that wipeout have long-term consequences? I think it might. I too would love to hear some other opinions here; but I think the feds are in a real tight spot. I suspect that they are not morons, and that they are trying to balance doing the "right" capitalist thing with the "practical" realpolitik thing. I am not thrilled about this, but I bet it's part of the explanation.
-The face amount of the preferred stock is meaningless. Who among us would pay 100 cents on the dollar for the crappy preferred stock now held by the US Gov't (Us). So the conversion will occur at some unknown ratio that may or may not leave the Gov't with 40% +/- of the equity.
-The important question for the holders of the private convertible preferred stock is what is going to be the carrot and what is the stick. $50 face C 6.5% Conv Pref is trading around $8.75 for a current div yield of about 37%. Current conversion ratio is 1.48, so if you voluntarily convert, you move down in the cap structure, give up the div yield and hold about one and a half shares of C common for you trouble - I don't think so. Now, the Gov't/C can offer to up the conversion ratio to something more palatable OR it can threaten to suspend div payments OR, more likely, some combination of the two to force/cajole conversion. And, back to the first point, there is not (nor should there be) a chance Mr. Private Convert Holder or the Gov't Convert Holder winds up with a conversion ratio that provides them with common stock worth 100 cents on the face dollar (in this case $50/$50.
Blackadder: Yes Baldrick. Let us not forget you tried to solve the problem of your mother's low ceiling by cutting off her head.
But...why not offer existing shareholders preferred stock in the newly cleaned up entity? for a price, of course. :)
Oh, the banks! Right! Well, the buildings will look fine without their current occupants, and gibbets are cheap to build. Gibbets, you say? Good Lord! But surely the fine drug dealers, thugs, psychopaths, and snakes that have been eating in the finer restaurants aren't THAT bad, are they? Well....easy enough to attach millions in illegally used armament investments to most of these guys....mass murder counts on the docket...and there's still room on the Gallows Tree for all the fools that voted for war, as well. All of them.
There was no capital injection for the additional $7B in preferred. That was the price for the huge asset guarantee on $300B of securities. Treasury has, however, committed an additional $5B in taxpayer money as 2nd loss backstop on the $300B (Citi takes first ~$30B in losses, then treasury at $5B and FDIC at $5B, then FED takes the hit for 90% of the rest (Citi the other 10%).
Technically the Treasury itself has committed itself to only $50B so far, but the potential for massive FED $$ printing to backstop C's losses is very real.
I get a laugh when I think about all the pundits on TV back in September of last year who claimed that TARP was actually going to make money for taxpayers and we were getting a good deal here.
It looks like between AIG and now Citi we have taken about $200 billion in losses so far.