Citi's Share Price Problem

When it comes to judging the stock market's reaction to the Citigroup (C) bailout, there's only one number that everybody's looking at: the Citi share price, which opened Monday at about $5.80. What does this mean? Two things are worth bearing in mind:

1. Ignore the percentage change, which will look massive, but only because it's coming off such a low base. At $5.80 a share, the stock's up less than $2 -- a perfectly healthy move, but nothing spectacular.
2. This time last week, Citi opened at a distressed level of $9.36 per share. By the close of trade on Wednesday, when it closed at $6.40 a share, panic was setting in -- the share price was so low that absent a major announcement it would almost certainly continue to decline all the way to zero.

At $5.80, then, the stock is still trading at what was, last week, a panic level. That's clearly not a good sign for anybody concerned about the viability of Citigroup, but it also comes as very little surprise, since there was almost nothing in the bailout for shareholders. Yes, they get to keep the full interest and upside on the $306 billion of assets which are being guaranteed by the government. But all the capital injections have come in the form of preferred shares with an 8% coupon -- shares which might look like equity from a regulator's point of view, but which look very much like extra debt from a shareholder's point of view.

As far as the common stock is concerned, little has changed as a result of last night's announcement -- and certainly there's been no change in any ratio based on tangible common equity, or TCE. That's the number which has most worried analysts: Citi's TCE is very, very thin compared to its rivals'. As a result, the Citi share price is likely to remain very low -- and as a result of that, concerns over Citi's future are not going to go away.

It's a vicious bind for the government. On the one hand, it doesn't want to bail out Citi's shareholders -- and indeed it shouldn't bail out Citi's shareholders. On the other hand, however, so long as Citi's stock is in the toilet, the problems at America's largest bank are not going to be considered resolved. I'm not sure how to resolve this dilemma without nationalizing Citi -- which is clearly something Paulson considers a last resort. It hasn't happened yet, but don't rule it out completely.

Disclosure: No positions.

Comments

[kam:]

Come clean are you short and now trying to defalte the stock so you can cover??? Be Honest now? Massive backing plan, cash injection and you you're still complaining?

2008 Nov 24 12:57 PM

[PineTar:]

The issuance of the preferred shares to the Feds and the restrictions on dividends were ridiculous demands/concessions. This was the opportunity to build a firewall for financials against the shorts. The Feds continue to refuse to recognize that until financial shares are bouyant, the shorts will continue to drive them down, and, consequently, continue to spark bank-run concerns. Now, get ready for the shorts to run down JPM and GS, and for the taxpayer to engage in another string of bailouts.

The Feds should have taken warrants at $12/share, and that's it. That way, you trigger substantial dilution at a fair stock price for the commons. They're protected, but hardly make out like bandits.

The Feds are being penny-wise, pound foolish.

2008 Nov 24 01:13 PM

[helplessobs...:]

I agree with a new attack on JPM and GS and possibly BAC. The beat goes on.

2008 Nov 24 01:22 PM

[Robert Ash:]

Felix,

Enough on C already. I want to hear your take on Chris Whalen's post at BPCafe today, www.ritholtz.com/blog/.../. I've found your comments on all things related to CDS's to be much more informative than the standard fare. Would love to hear your take on his discussion of the "CDS bubble".

Robert Ash

2008 Nov 24 01:44 PM

[cpatwork:]

why is it so hard to understand, citi failure means your idea of top banks jpm, gs, bac would fail under mark to market...you know this or at least should. only a clown would look at the stock price as the arguement for failure...its over move on to some other bank..this one will makes it..sorry but get a job on cnbc you might look smart there

2008 Nov 24 03:19 PM

[Muzie:]

"the share price was so low that absent a major announcement it would almost certainly continue to decline all the way to zero."

Felix, you write good articles most of the time.

This statement you just made implies you believes that the stock price going too low implies it will cause the company to go bankrupt. Call me old-fashioned, I thought it was always the other way around.

Am I missing something in your reasoning here? It's one thing to say a low stock price indicates uncertainty about a company's prospects, it another entirely to see a low stock price actually becomes the cause for those low prospects.

2008 Nov 24 06:33 PM

[User 306073:]

When someone continues conduct that you don't understand or odd, like Felix Salmon's constant slamming of Citi, ask yourself, "why is that ?"

He has an agenda that sooner or later will make sense,
(he's been short)

2008 Nov 24 07:16 PM

[Kunst:]

Wow, what a bunch of Citi whiners! Do you really think the author is trying to, or could, affect the stock's price? Come on. He has his opinion. If you don't like it, state your reasons. Attacking him personally just makes it look like you have no objective basis to your opinion.

2008 Nov 26 12:39 AM

[QC:]

Don't feel sorry for CITI, I think they are like Wachovia, maybe not too big to fail, Maybe too big to manage itself. I do not like banks, here is why. Several years ago banks tried to be like insurance companies. And insurance companies tried to be like banks - like Nationwide. Banks try to be investment/stock brokers too. What a joke. Do they really think they can compete with the big top brokers.
They (banks) are not very good at this. They should do what they are good at.
GE and GM play in the credit game, they are not very good at this either. Just because you have a lot of resources and people, does not guarantee that you will do well.
Banks should manage savings and checking accounts, and make some loans, not pretend to be insurance companies and stock brokers, which they are not.

Feb 21 12:15 PM