The Rules on Buybacks Ought to Be Changed for Citigroup

As I watched Citigroup (C) swing in the wind on Friday, yet another financial shorted down to a fraction of its book value, with the usual discussions - the market knows something, no one will do business with the firm, rumors about the assets - I came up with an idea which I think would solve this type of problem.

The problem is, when a company is under a short-selling attack, its hands are tied as far as defending itself. There are definite rules aimed at preventing companies from manipulating their share prices, which limit the amount and price of buybacks a company can do. To be protected against allegations of manipulation, it can't trade more than a certain percentage of the day's volume, I think it's 25%, and it can't buy above the last trade.

Citigroup, at 3.77, is now trading at a fraction of tangible book value per share, which is about 9. GAAP Book value is around 18. As pundits pointed out Friday, the company's market cap at 20 billion was less than its TARP infusion of 25 billion. We know it has the funds, why not buy back as many shares as possible? Some would complain on behalf of taxpayers that the use of TARP funds was inappropriate. But I would answer, Treasury holds warrants - if the value of shares is increased, the value of the warrants is increased.

My suggestion: when a company's shares trade below book value, it enhances shareholder value to buy back the shares. So, once the stock gets below book, management should be given carte blanche to buy as much stock as cash resources permit. Current legislation should be changed to provide a Safe Harbor exception of this type.

MBIA (MBI), whose shares closed Friday at 4.24, which is .36 of book, would be a case in point. The company has approximately 293 million left on its buyback authorization: at Friday's close it could buy back 69 million shares, approximately 25% of the total 273 million that have been issued. That would increase management's best estimate of the total economic value of each share from 37.55 to approximately 50.00, well worth doing.

If management's hands were not tied by law, it could make a quick end of the problem of aggressive short-selling by buying up the entire short interest. In MBIA's case, there are quite a few large holders such as Warburg Pincus and Third Avenue, leaving a limited amount of shares available for short-sellers to cover with. A wonderful short squeeze, like the one on VW, could be created.

Hartford Insurance Group (HIG) would be another case where the legal permission to conduct aggressive buybacks would be appropriate. Even Allstate (ALL) is trading at half its book value.

Again, the rule would be that once shares trade under book value, the company can do buybacks freely and unannounced, as many shares as the market offers for sale on a given day.

This type of short-selling is basically a down in the gutter brawl: the problem is, management is playing by Marquis of Queensbury rules while their adversaries are kicking them below the belt and gouging their eyes out. Why not change the rules so company management can defend the interests of shareholders? We could give company management access to the same financial weapons of mass destruction used by the short-sellers.

Many expect that by Monday, Citigroup will have been disposed of by another of these week-end marathons, with the shareholders wiped out. It would be better to let the company defend itself than to ratify the damage done by short-sellers and rumormongers in a fear-crazed market.

As a matter of fact, I think it would be legally correct for a company to assert the self-evident fact that it is creating share value as a defense against any and all charges of manipulation in a case of this type. A company like Citigroup, when under attack, should simply buy as many shares as possible. If taken to court, the defense is simple: it is self-evident that management was acting in the interests of shareholders - the shares were trading at less than the value of the assets. Res ipsa loquitur.

Disclosure: Long ALL, HIG, MBI; no position C.

Comments

[mik123:]

Deutsche Bank, UBS, and the Royal Bank of Scotland just had their governments inject additional capital to restore confidence in the respective countrys biggest banks. To think the U S wouldn't do the same for our biggest bank would make us look like fools since we are following their model of injections. Injection money can be used to buy other banks so why not your own common stock.
I don't see one analyst stating to sell any of the big three financials. In fact I have seen Dick Bove and Mayo say buy with price targets 3-6 times Citigroups current price. These are two of the top 3-4 analysts who rate the stock. Mayo came out Friday after the close and said the minimum value would be $9+ .
Citigroup and the other two are only in this predicament because of Paulsons decision last week to abandon the whole purpose of TARP - to purchase troubled assets. When he made the announcement, he said some of the same original banks will now need additional injections. What is he waiting for. Citigroup, Bankamerica,JP Morgan, lost up to half their value with Citigroup being the worst. If you eliminate short selling, Citigroup would rally. What's happening is you have a huge amount of short selling and at the same time their buying cedit default swaps. Watch what happens to the stock if the SEC re-instates a ban on short selling on financials. Christopher Cox of the SEC has a conference call Monday regarging this. Citigroups financials are actually better than Bankamerica and JP Morgan since both purchased companies with very bad financials. These are the three largest financials in the United States. Once Citigroup gets through 2009, it will get back to earning 25 billion per year. At 10x earnings that's a 250 billion market cap which is 12.5x the current market cap. 12.5x the current price takes it to $47 a share. Investors who bought GPU after Three Mile Island at $3 ended up getting 20-30x their money. It takes guts when it looks questionable. You don't panic because profiteers are trying to destroy the stock so they can make a quick buck. Nothing has changed with Citigroups financials in the past month when the President of the United States, Fed chairman Bernacke, FDIC chairwoman Sheila Bair, Treasury secretary Paulson all agreed that Citigroup would takeover Wachovia.Go to the FDIC's website and read the Sept. 29th press release. They were obviously healthy enough then. Citigroups financials will begin to improve quickly with gas prices cut in half. Eighty percent of the country lives paycheck to paycheck. With your average couple paying $50 less per week in gas, that's $2,600 extra for mortgage and credit cards that wasn't there in August when it was still $4 a gallon. Consumers only had this

2008 Nov 23 02:14 PM

[Kevin Walmsley:]

Um . . . you can change the rules all you like. But if Citi doesn't have the money to pay dividends, and if they put Rubin on a jet with a cup in his hand, raising capital wherever he can find it, it's likely they're not going to be announcing any big share buybacks anytime soon.

2008 Nov 23 02:16 PM

[Kevin Walmsley:]

On Nov 23 02:14 PM mik123 wrote:

> Once Citigroup gets through 2009, it will get
> back to earning 25 billion per year. At 10x earnings that's a 250
> billion market cap which is 12.5x the current market cap. 12.5x the
> current price takes it to $47 a share.

How much of that $25 billion came from subprime and mortgage origination, which won't be back EVER. How much of that $25 billion came from mark-to-market trading in derivatives and CDS's? How much of that $25 billion came from asset-based management, which have been chopped in half? And how are they going to get back to $25 billion, given the fact that they've laid off so many of the people who generated those false profits in the first place?

You also, of course, assume no additional losses going forward. That foreclosures stop right now, credit card debts suddenly get paid, and unemployment heads the other direction.

Well, time will tell. That's what markets are for, after all.

2008 Nov 23 02:22 PM

[Alan Young:]

As of Friday's close (post-rally), there are still 166 stocks in S&P 500 (i.e. 1 in 3) trading below book, the largest being JPM (P/B=.58).

In the 500, 149 have a float/short ratio over 5%; 72 are trading below book. That's more than a random sample (which would be 1/3 of 149, or 50), but not overwhelming odds. C, however, is not in this group: its short float is only 2.6%

IOW, there are a lot of cheap blue chip stocks now; a lot of stocks are being heavily shorted; the two measures are only loosely associated. If you graphed the correlation, C would be an outlier, being far more undervalued than its short float can account for.

Therefore, short-sellers certainly can't be blamed for C's low value. Could it be their record of opaque bookkeeping ?

(disclosure: no position in C; holding SKF intermittently)

2008 Nov 23 02:42 PM

[Jackson Cash:]

Ray Charles could see that Citigroup is a fragmented bunch of dishonest greedy thugs, and no one knows what they are hiding off balance sheet. I won't do business with them and I encourage everyone with a pulse to do the same.

One thing for sure, a corpse swinging in the wind sends a powerful message to everyone else, regardless of truth.

2008 Nov 23 03:03 PM

[PackMan:]

I agree 100% -

a) CITI should and should be allowed to buy back stock right here, right now; they have plenty of liquidity.

b) Fools at the SEC need to ban NAKED shorting for everyone, including market makers; bring back the uptick rule; and perhaps suspend short selling for some time. These stocks are being overwhelmed by computer programmed naked short sales, which ram down the stock prices - short and cover, short and cover ... all the while creating panic, fear, forced sales, liquidiations which feeds into the frenzy and panic.

c) Halt all CDS trading; leveraged ETF trading; CMBX index trading. These are all part of the problem.

c) Time for the idiots at the FED Treasury and SEC to get their respective acts together and put an end to this assault on our country.

2008 Nov 23 03:04 PM

[PackMan:]

Citi has quite a bit of earnings power

2008 Nov 23 03:05 PM

[briacal:]

there are some hidden abuses in the dark cloud of short sellinng that an average,good faith ,small investor like me can't understand.The experts ,however,know where the negatives are and they should have the guts to come up with suggestions that could make the process less traumatic and less abusive.

2008 Nov 23 03:26 PM

[ironpants:]

We absolutely need to STOP the SHORTS, before the destroy the market.

2008 Nov 23 04:36 PM

[pedroperez:]

Mr. Paulson and Mr. Bernanke are not capable of solving any problem not matter how small it could be. There is not brains in ther heads only vanilla yogurt.

2008 Nov 23 05:01 PM

[Byallmeans:]

Let em fail their not special.

2008 Nov 23 07:09 PM

[Jadogsl:]

Former Fed Officials agree...

Thanks for your comments, which are quite thoughtful. I will keep up this fight until SFAS 157 is suspended, as it is destroying our financial system and taking the economy with it.
Best regards, Bill William M. Isaac
Chairman
The Secura Group of LECG


--- On Fri, 11/21/08, Bob McTeer wrote:

From: Bob McTeer <soupcolddog@yahoo....

Thanks. I heard Sec Paulson on the radio yesterday refer to mark to market accounting as "pro cyclical." That's encouraging. Bob

______________________...

Did the enforcement of Fair Value Accounting i.e FAS 157 effective for fiscal years beginning after November 15, 2007 coincide with the early stages of the meltdown of the bond and equity markets ? Or was it a coincidence ?

There is no doubt that some financial-services firms found themselves ill-equipped to perform such acrobatics. Finance executives in the sector complained that the fair-value rules were "pro-cyclical" - that they were a self-fulfilling prophecy forcing banks to sell their securities in plummeting markets. ( paraphrased from CFO.com )

The big picture, a common sense view .... CSCO stock was at $80 in 2000. The cash flow value was $18. Had margin been against $18 instead of $80 the bubble in tech stocks may never have happened. Also in 2002, CSCO was at $11. Cash flow value ? $18. How do the purists defend Fair Value accounting 'allowing' margin loans against an $80 stocks really worth $18 by conservative estimates ? Migrate this example to Las Vegas real estate in 2005 and you have the achilles heal of Fair Value accounting.

George Soros speaks of reflexivity as the main component of his investing thesis. The key element is banks lending against overvalued assets create bubbles and the withdrawal of lending against falling asset values creates the bust. A mark to model across all spectrums, Margin...Home lending etc would REDUCE the risk to our financial system and bring sanity to our financial markets.

The real fix is INDEPENDENT firms that audit companies. Firing without cause should be eliminated when it comes to these firms. Whistleblower laws with teeth wouldn't hurt either. After all Enron wasn't a mark to market issue. Top people knew the value of the assets but were afraid to speak. It was a regulatory issue.

The case is made by an esteemed former official ... sec.gov/comments/4-573...

The effects are felt .....
www.researchrecap.com/.../

The proof is in ......
seekingalpha.com/artic...

2008 Nov 23 08:13 PM