As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Monday, February 23, 2009

Stocks And The Citi

Today kicks off the stress tests administered by the Treasury Department for the nation's banks. I don't expect the results to be completely transparent until the moment any bank is found to be insolvent, because the chaos that would ensue from a minute-by-minute reading of the stress test would sink the financial system. But we're already learning that Citigroup wants the feds to get more involved in their operations:

In yet another sign of distress for the banks, Citigroup officials were in active talks with federal regulators on Sunday night about plans for the government to take a bigger ownership stake in the bank, according to a person close to the talks.

Citigroup approached the regulators with a plan that would allow them to convert a large amount of the government’s $45 billion of preferred shares, which is treated as debt, into common stock, this person said. The government owns a stake of roughly 8 percent, but that could grow to as much as 40 percent.

Converting the preferred shares while also issuing more common shares would bring Citigroup closer to the mix of equity that the government is likely to demand when it introduces the stress test. But that would severely dilute the value of shares held by existing Citigroup stockholders.

This sounds like the taxpayers would get a real stake in Citi, and the shareholders would face reductions. Which is good, right? Well...

In exchange for its investments, the government required the banks to issue preferred shares that pay interest and are designed to encourage repayment after a few years. Under the changes announced this morning, companies instead can give the government preferred shares that can be converted into shares of the company's common stock [...]

Companies that convert the government's investment to common shares can reduce required dividend payments and ease repayment pressure for the banks. The change could encourage more people to invest alongside the government. And there is a significant but technical accounting benefit. The swap would significantly improve banks' performance on a measure of health used by financial analysts called tangible common equity, which basically judges a bank's reserves against future losses.

We're not getting full value for our investment as taxpayers. We're overpaying without getting a return for perhaps years. You just have to do the math.

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.

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?

It's a black bag job. Elites have such a stranglehold on this government that I couldn't see us getting out of this without at least some handout, but the fact that such a simple math equation can be used to prove it makes me think that we have stupid elites, too. Of course, the handling of the economy over the past few years proved that.

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