Government Makes 3rd Rescue Attempt For Citigroup
The U.S. government will exchange up to $25 billion in emergency bailout money it provided Citigroup Inc. for as much as a 36 percent equity stake in the struggling bank, greatly increasing the risks to taxpayers as voter unhappiness about the broader bailout program rises. http://cbs2.com/national/citigroup.government.deal.2.945596.html
The $25 Billion was originally secured by “Preferred Shares” of Citi Group Stock. These “Preferred Shares” paid the US Taxpayers 8% interest and were “first in line” to be repaid should Citi Group eventually end up in receivership. The “Preferred” shares provided the best security possible for American Taxpayers.
“Taxpayers will also lose roughly $2 billion in dividends, because the preferred shares they are giving up paid 8% dividends. Citi suspended its common stock dividend as part of the agreement.” http://money.cnn.com/2009/02/27/news/companies/citigroup/index.htm?postversion=2009022709“Common shares absorb losses before preferred shares do, which means taxpayers would be on the hook if banks keep writing down billions of dollars’ worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.” http://cbs2.com/national/citigroup.government.deal.2.945596.html
The Obama Administration decided to employ an “accounting trick” on Friday in the hopes of improving the “look” of the Citi Bank balance sheet without making any meaningful change. Once again we get get style over substance. No additional funds were provided, the $25 Billion was simply moved from the “Preferred” to the “Common Stock” column on the balance sheet.
“The swap of $25 billion of preferred shares into common stock will expose the government to the same risks facing other holders of the bank’s common stock“. http://cbs2.com/national/citigroup.government.deal.2.945596.html
In exchange for the “security” Taxpayers enjoyed from owning “Preferred” shares, the Government obtained working control of Citi Group by obtaining a 40% stake in the company’s Common or voting stock. These Common Shares will be held in a “trust” in the Treasury Department where between 1 and 3 individuals will be politically appointed to, in essense, make secret decisions behind closed doors that will direct what activities the CEO and Board of Directors of Citi Group take. That is right, they will direct what types of loans are made and to whom. Isn’t that how we got in this mess in the first place?
In making this move the Government agreed to pay $3.25 per share for the Common Stock it obtained. That is right, the Government agreed to pay $3.25 a share for stock that sold for $2.46 a share the night before. The Government agreed to pay a 33% “mark-up” on the true value of the stock as of the start of business on Firday morning, 02/27/09. I’m outraged, the Government “threw away” 33% of the taxpayers $25 Billion (or $8.25 Billion) with the blink or wink of an eye.
“ Citi will offer to exchange up to $27.5 billion of preferred stock at a conversion price of $3.25 per share. That’s a 32 percent premium over Thursday’s closing price of $2.46.” http://cbs2.com/national/citigroup.government.deal.2.945596.html
“The new deal Friday did not give the bank any additional taxpayer dollars. But the government is taking on a greater risk by assuming more volatile common shares. The market price is well below the $3.25 per-share conversion price the government is paying.” http://money.cnn.com/2009/02/27/news/companies/citigroup/index.htm?postversion=2009022709
What does this mean? The Government paid $25 Billion for stock worth $16 Billion at the start of the day Friday. What is a $9 Billion Dollar loss anyway? Its only taxpayer money!
“The administration decided to restructure the bailout package for Citigroup again in the hopes that converting $25 billion of preferred shares into common stock would give investors more confidence that the bank has sufficient capital reserves to withstand mounting losses on its holdings of mortgages“. (Yes, that is right, the “Sub-prime mortgage crisis” caused the “banking crisis” which in turn brought down the US and World economy). http://cbs2.com/national/citigroup.government.deal.2.945596.html
“Investors appeared disappointed in the deal and expected dilution of their stake, sending shares plummeting 81 cents, or 32.9 percent, to $1.65 in midday trading”. http://cbs2.com/national/citigroup.government.deal.2.945596.html
Was that it? Stockholders were disappointment that the value of their stock was diluted or were shareholders concerned that the Government had taken over “voting control” of Citi and that policticians, exercising voting control through a “stock trust” will secretly direct all of the activities of the Citi Group from behind closed doors in Washington? Earlier this year (January 2009) Richard Parson’s, an Economic Advisor to Obama, was named Chairman of the Board of Citi Group. http://www.cbsnews.com/stories/2009/01/21/business/main4745963.shtml?source=RSSattr=Business_4745963
Obama’s plan was for the “accounting trick” or “stock switch” to increase Citi’s “tanigible common equity” while the Politicians took over voting control of Citi. To many, when a Government takes over voting control of a Bank and suspends Common Stock dividends of that Bank, that Government has Nationalized that bank.
“For Citigroup, the conversion is important because it increases the bank’s tangible common equity, making an improvement in the bank’s troubled balance sheet.” http://money.cnn.com/2009/02/27/news/companies/citigroup/index.htm?postversion=2009022709
By the close of the business day on Friday (02/27/09) Citi Common Stock was trading for $1.50 per share, a drop of nearly 40% off the stock price of $2.46 at the start of business on Friday. (A 40% drop from the actual trading price at the start of the day $2.46 share, not the “artificially” high price the Government paid of $3.25/share). http://data.cnbc.com/quotes/C/tab/8
Obama’s “trick” to improve Citi’s “tangible common equity” failed miserably – Citi’s net “tangible common equity” droppped 40% on Friday. The US Taxpayers $25 Billion in “Preferred Stock” was worth $11.5 Billion in “Common Stock” at the end of the day. In addition the Taxpayers lost $2 Billion a year in Dividends that the “preferred stock” was paying.
A $13.5 Billion Dollar loss in one day …. What the heck, it is only taxpayer money anyway ….. and now the Government can run Citi behind closed doors. I’m sure the Administration thinks this move would have been cheap at twice the price – heck its the taxpayers who are on the hook and the Administration can just ignore them.
Am I really to believe that this group has even a remote chance to turn this economy around and cut these huge deficits? Why am I to believe that?
I’m anxiously awaiting the specifics of the “bank stress test” and the details of the “homeowner mortgage bailout” plan.
McAuley’s World Update (03/05/09) Citibank Common Stock closed today at 99 cents per share. Citi stock is now a penny stock. The 30% decline from yesterday’s closing price signals that the US Taxpayer has now lost almost 70% of the Government’s investment in Citi-bank. Commentators note that the Government’s “grab” of Common Stock has reduced the value of private stockholder’s investment in Citi – resulting in a major sell-off of Citi stock by the private sector. The drop in Common Stock Price has further lowered Citi’s Equity Value negating or wiping out the Government’s intended result when it completed the last Citi bailout earlier this week.
Filed under: Barack Obama, Citigroup, Obama's Take Over Of Citi Group Blows Up Tagged: | Obama Administartion Takes Over Voting Control Of Citi - Stock Plunges 40%, Obama's Citi Accounting Trick Blows Up, Obama's Citi Bailout Goes Bust, Taxpayers Lose $13.5 Billion of $25 Billion Citi "Investment" in 1 Day