Monday, February 23, 2009

Citi Is First In Line

It sounds like Citi is in talks with the Government to essentially nationalize the bank. It sounds like a very sweet deal for Citi. As Henry Blodget writes,

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%.

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.

Does this strike anyone else as completely corrupt? I hope there is more to the story that will come out as the situation unfolds. But as it is now being reported, it just doesn't sound fair or equitable to taxpayers.

The sad thing about the story is that this kind of corruption doesn't suprise me. I expect to hear about many more handouts in the billions of dollars this year. This is still only the beginning.

Questioning Politics

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