Monday, February 23, 2009

Is there anything about this Citigroup story which makes sense?

From Felix Salmon:

"
Untangling the Citi Speculation

Is there anything about this Citigroup story which makes sense? First the WSJ reports that Citi is trying to persuade the Obama administration to swap its preferred stock for common equity:

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%...
Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said.

As Henry Blodget notes, the math here doesn't make a lot of sense. Citi's market cap is about $10 billion. So if the government were to swap into a 40% stake, it could only swap about $7 billion of its $45 billion in preferred stock. Which isn't really "a substantial chunk", and wouldn't exactly do wonders for Citi's tangible common equity.

Then the global stock markets read the story, and went up:

World stock markets were mostly higher Monday on reports that the Obama administration was not planning to nationalize one or more of the big American banks and was instead looking at ways to raise its stake in Citigroup Inc...
Worries that major Western banks like Citigroup and Bank of America might have to be nationalized because of mounting bad debts sent global markets sharply lower last week.
But investors seemed relieved by reports that Citigroup is negotiating with authorities to increase the government's stake in the teetering lender to as much as 40 percent.

This is all a bit weird, since as far as nationalization is concerned, this both looks and quacks like the proverbial duck. But I think I understand what's going on: remember those trust preferreds? The market wasn't afraid of nationalization per se, but was rather afraid of the kind of nationalization which would involve wiping out a large chunk of Citi's existing debt securities. A simple swap of preferreds for common doesn't do that: it leaves all Citi's bondholders whole, which is the sort of nationalization the market can live with.

Citi stock is back over $2 a share in early trade; if you're trading at option value, any indication that shareholders won't be wiped out entirely is good news for the share price. But these are truly extraordinary times, and we're still a long way from being able to see how all of this is going to shake out -- not least because the famous stress test hasn't even started yet. Of course, that has problems all of its own."

Me:

I just looked at the Top 10 Market Cap graph on EconomPic Data. Doesn't it speak for itself? If we said no more money, what would the price of these stocks be? If there were a chance in hell that these were decent investments, wouldn't at least one crazy investor be willing to buy these things at these prices? What about China? We can buy them outright with TARP money? Who would lend out more money to a business than you can buy it, own it, and run it for? It's too complicated. Hasn't it occurred to anyone that it's these banks and bankers which are the problem? Yes, they're bank holding companies. Do you wonder why no one will buy any of their other assets? They probably don't trust them. They believe that they'd be buying crap, since these chaps couldn't run a water stand in a desert trade route and make a profit. Forget economics. Could someone just explain to me in simple terms what I'm missing? The shareholders and bondholders will be wiped out. For heaven's sake, they invested in some of the worst run businesses in human history. I give up.

No comments: