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The nausea we feel with respect to Citigroup (C) and our Treasury Secretary just hit a new high.
Perhaps it’s true that civilisation would have ended if we had just allowed Sandy Weill’s colossal junk pile to finish blowing itself up. But at this point that seems a more attractive alternative.
In case you missed it, here’s the latest outrage:
As of yesterday afternoon, the United States taxpayer owned 34% of Citigroup’s common stock, in addition to a massive amout of TARP preferred stock. The US taxpayer did not own 34% of Citigroup’s common stock by choice. We owned it because our government decided to bail Citigroup out not once, not twice, but three times.
In the last of these bailouts, the Treasury Secretary Tim Geithner gave Citigroup the latest in a long series of gifts, by converting some of our preferred stock to Citigroup common stock at $3.25 a share. This conversion price was too high and resulted in an invisible bailout/gift that most people missed. It also left taxpayers with the dubious privilege of holding Citigroup common stock.
Common stock is lower in the capital structure than preferred stock, meaning that it will be the first thing to be wiped out if Citigroup starts losing boatloads of money again. As Citigroup investors know all too well, common stock also carries with it a high possibility of loss: If the stock price falls, we’re toast (whereas with preferred stock, we get our money back when the company redeems it).
Given all that, the first taxpayer holding that Citigroup should have sold should have been the common stock.
Citigroup’s stock has been trading at $4 for several months. It is heavily traded. We could have dumped our entire stake in the company over the past few months for a reasonable gain. Instead, we just sat there, waiting to be reamed again.
Then Citigroup decided that it simply had to pay the TARP money back (understandable). Of course, Citigroup didn’t have the money to do this. So it had to raise the money by selling $17 billion of new common stock at a huge discount to the trading price ($3.15) and diluting the heck out of the US taxpayer again. We now own only 26% of Citigroup, down from 34%. This value destruction is permanent.
As was the case with Bank of America and the rest of our bailouts, the fault for this one cannot be laid merely at the feet of Citigroup. Citigroup is behaving sensibly under the circumstances. The fault can–and should–be laid at the feet of the man who likely has done more for Wall Street at taxpayer expense than any man in history: Tim Geithner.
Will we get our money back? Possibly. If Citigroup stock recovers, and we sell our stock this time, we’ll do fine. But we could still lose all of it. And, as with Bank of America, et al, by allowing the bank to redeem the TARP before implementing any new reforms or controls, we’ve given up whatever leverage we had left.
Here’s how banking analyst Chris Kotowski of Oppenheimer describes what just happened to us:
Earlier this week, when Citi announced its plan to repay TARP, we characterised it as a mixed blessing and noted that we were disappointed that the plan began with capital raising to repay the TARP preferreds and ended with the sale of government shares rather than the other way around. In retrospect, we had no idea of our gift for understatement. We believe that there would have been plenty of demand for government shares at over $4 per share because it would been a clear step toward a normal ownership structure. Instead, by forcing the sale of common while still having the overhang of the government, their shareholders, most prominently including the American taxpayer, have been needlessly diluted.
Citigroup announced Wednesday evening that its offering to repay TARP was priced at $3.15 per share, 20% below last Friday’s close. As a result, the government did not sell any of its shares, obviously not wanting to show a loss versus its $3.25 cost basis.
As a result, the taxpayers’ 7.7 billion share stake in Citi has been diluted from about 33% of the company to about 26% without a single dollar being raised for Treasury. Value has been permanently lost because the dilution is permanent. We estimate that between August and November, some 37.9 billion shares of C traded hands at or above $4/share. There was ample opportunity to sell most if not all of the UST common at a gain, which is the most troubling aspect of Citi’s relationship with the government for private sector providers of capital.
Instead, Citi’s private shareholders continue to live with a large government stake. As long as that stake persists, we believe there will be a cloud over Citi stock as shareholders will fear that the company will be run more on Washington logic than on business logic.
We believe Citi will end up with about 30B shares and a tangible book value of just under $4 per share. We believe that the stock can trade back toward tangible book, but we do not see it earning a premium until the government stake has been sold.