Please, just put Shittygroup out of its misery already.
Forbes link
Dilution Fears Rattle Citi
Jeremy Bogaisky, Vidya Ram and Miriam Marcus, 02.27.09, 04:40 PM EST
Investors send the bank's stock down 39.0% following news of Uncle Sam's involvement.
Citigroup Inc.
Citigroup shares dove on Friday after it confirmed that taxpayers would take on a bigger share of the bank as the U.S. government sought to bolster its capital. According to Citigroup, up to $25.0 billion of government-held preferred shares in the company will now be converted into common equity.
The deal would see the government's voting stake in Citigroup (nyse: C - news - people ) rise to as much as 36.0%, from the current level of 7.0%. This will be accompanied by an infusion of new members on the bank's board, giving it a majority of independent directors, the bank's chairman Richard Parsons said Friday.
Shares of Citigroup plunged 39.0%, or 96 cents, to close at $1.50, on Friday, suggesting that investors feared further dilution of their holdings.
Following the announcement, an analyst from Goldman Sachs said to avoid Citi shares, and that the bank may need to seek further funding, according to TradeTheNews.com. Moody's lowered its long-term ratings on Citigroup to Ca, or junk status, from Baa3; senior debt rating was cut to A3, from A2-; and senior subordinated debt was cut to Baa1, from A3.
Citigroup will offer to exchange up to $27.5 billion of preferred stock held by the likes of the Government of Singapore Investment, at a conversion price of $3.25 per share, 32.0% higher than Thursday's closing price. The U.S. Treasury will match those private conversions dollar-for-dollar up to $25.0 billion. The Treasury currently holds about $45.0 billion worth of preferred stock purchased through two previous capital injections.
According to Jane Coffey, fund manager at Royal London Asset Management, the conversion to common equity would remove a major fixed-cost burden for Citigroup, similar to a move that had been made by the British government for Royal Bank of Scotland (nyse: RBS - news - people )last month. "When they have common equity then the dividend only gets paid when the company can actually start affording it, but with preference shares they are paying a high fixed rate," she told Forbes. "This gives the company more flexibility."
Citigroup would receive no new government funds, but the deal will give it more cash to work with, given that it will no longer have to pay the hefty dividends on the preferred shares that are being converted.
The conversion of preferred shares to common will also raise the bank's Tier 1 capital ratio (preferred shares count as debt), leaving it better able to withstand losses.
It is an open question, though, whether it will be enough to allow Citigroup to withstand the heavy losses that are expected over the next few quarters from souring consumer loans.
The third major Treasury intervention to aid Citigroup since mid-October follows more than a week of negotiations with the company, once the world's largest financial services group.
The move also comes days after the Treasury and assorted federal regulators began stress testing the 15 biggest U.S. banks, including Citi. (See "Stressing Out the Banks.") The tests, which will take several weeks, could draw a bright line between winners and losers in the banking sector. The result of this stress testing will be a new round of temporary capital injections in the banks that are determined to need it, using a template that is very similar to the Citi deal.
The Citigroup equity raising will severely dilute the value of existing shareholdings, hurting such big investors as Saudi Prince Alwaleed bin Talal, however, the hope is that it will bolster confidence in the ability of the company to survive and support its stock price, which fell below $2 last Friday on fears that the bank would be nationalized.
Citi's announcement of the deal left investors with more questions than answers. "Though we're dealing with Citigroup today, there's still lots of questions about Bank of America and other banks," said Rich Hughes, co-president of Portfolio Management Consultants. "We're waiting for the results of the stress test and it's weighing on investors' minds."
"Until we can come up with the actual assessment and get it out on the table, I think we're going to live in this unpredictable, unstable period," Hughes added.
Charlotte, N.C.-based Bank of America (nyse: BAC - news - people ) has also been under considerable pressure lately as investors worry it could be the next in line to receive a third bailout from the government. Shares lost $1.37, or 25.8%, to close at $3.95, on Friday.
Shares of Wells Fargo (nyse: WFC - news - people ) dropped $2.30, or 16.0%, to close at $12.10, on Friday. The San Francisco-based bank said that it has suspended its bonus policy for its chief executive and other top executives; they will also not receive bonuses for 2008.
Even JPMorgan Chase (nyse: JPM - news - people ), which is considered one of the strongest banks compared with its peers, lost 20 cents, or 0.9%, to $22.85, on Friday. The New York City-based bank has yet to post a quarterly loss during the financial meltdown that began in 2007 with the subprime mortgage crisis, and CEO Jamie Dimon expects the bank to remain profitable through 2009, including the first quarter.
While the deal, as outlined, falls short of giving the government a majority stake in Citigroup, there is little question that the bank's executives will more than ever look to Washington for direction on strategy.
For taxpayers, the transaction means the government is giving up the safety of a steady dividend payout on its preferred stake, as well as precedence over common shareholders in the event of liquidation. To compensate, the conversion reportedly will come at the most-favored price, meaning the government will get the best price of the private shares that are converted.
Citigroup is dead. It has no prospects for positive cashflow and no way of stopping its losses. Unfortunately it's "too big to fail" so I see the government pouring billions into it every month to keep it in a zombie-like state, it's like
Weekend at Bernie's, except it ain't funny.
