Everyone on CNBC this morning has been expressing shock about Citigroup’s sub-$4 stock price. It’s just “fear,” they’ve said. It’s “irrational.” It’s “forced selling.”
No, it isn’t.
It is Citi’s common stock investors waking up and realising that, no matter what the firm does, they stand a good chance of getting wiped out.
Citigroup’s common stockholders are at the end of a long line of folks who have a claim on Citi’s assets: secured bondholders, unsecured bondholders, preferred stockholders. Thanks to Citi’s preferred stock positions, the company’s assets to tangible book ratio (the leverage that matters to common stockholders) is 56-to-1. Put another way, if the company writes down 1/56th of its asset value, the tangible net worth will be wiped out.
Citigroup may, in fact, have plenty of capital to survive asset writedowns (although some would surely debate this): After the government infusion, the company’s assets to equity ratio is 14-to-1. Citi’s common shareholders will get hit first by any writedowns, however, and they are very exposed.
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