Taxpayer Takeover of Citi Should Bring More Fear

The Wall Street Journal is reporting on its website that Citibank and the United States Government are negotiating a deal which would make the Government a substantial owner of Citibank common shares.

The ownership would come about as a substantial portion of the preferred stake which the government currently owns is converted to common shares. The article suggests that the bank and government are negotiating the percent of Citi that the taxpayers would own, and says that it would be between 25 percent and 40 percent.

This would be the most explicit admission yet that Citibank is insolvent in its current form, and after some initial jubilation and euphoria financial markets should respond with fear, as investors recognize that Citibank is not alone in its plight.

Update: The Financial Times has a story on the same topic.

Comments

[fakir:]

Hey John - the beauty of the market is that it cuts both ways, the shorts are going to get squeezed and a lot of people are going to be quite happy about it. RBS is nationalized effectively and it is still paying its prefs their coupon and a smart two tier equity structure is put in place so that total nationalization is not required.
The article is poorly written as it states things without analysis, seemingly the motive is to give hope to shorts.

Feb 23 05:01 AM

[Moon Kil Woong:]

Citibank under 25% makes it tradable on the stock exchange. Any % above makes it untradable unless they get some exemption. FYI a company can not trade on the stock exchange if one owner owns more than 25% of a company.

Likewise, I think the government owning any portion or guaranteeing any portion of a company makes it socialized since it can force them to do things that are based on political interest even at the detriment of the shareholders and/or use public money/backing for enrichment schemes like Fannie Mae and Freddie Mac.

So when Obama says he doesn't support socialization I won't believe it (just like I don;t believe bush Jr.) unless he gets government out of Freddie Mac and Fannie Mae. Politicians are so much talk and so very little action. That's why I don't bet on stock based on their coy words.

Feb 23 05:13 AM

[Tom Armistead:]

Here is a quote from the interagency statement of 2/10/09:

"Our expectation is that the capital provided under the CAP will be in the form of a preferred security that is convertible into common equity, with a dividend rate to be specified and a conversion price set at a modest discount from the prevailing level of the institution's stock price up to February 9th, 2009. This security would serve as a source of "contingent" common equity, convertible solely at the issuer's option for an extended period of time."

If the USG proceeds as it expected to, any stake taken will value the stock at a slight discount to the 2/9 clsoing price, 3.95. I would question the wisdom of shorting the stock at Friday's close of 1.95.

Feb 23 07:35 AM

[joyboy:]

Hey, things could havebeen worse..case in point..what if Citi's bid for Wachovia had gone thru? I daresay we taxpayers would have really been on the hook, eh?

Feb 23 11:43 AM

[NITRAM:]

You are an idiot. Citi was getting Wachovia for free. Bank Of America paid billions for Wachovia. To be more accurate, the taxpayers gave Bank of America the money to buy Wachovia and Merrill.Tryy read between the lines.


On Feb 23 11:43 AM joyboy wrote:

> Hey, things could havebeen worse..case in point..what if Citi's bid
> for Wachovia had gone thru? I daresay we taxpayers would have really
> been on the hook, eh?

Feb 23 02:39 PM

[joyboy:]

Who is the idiot? Check it out nitram..
Wells Fargo bought Wachovia..not B.O.A.

Feb 23 04:56 PM

[maryanne:]

NITRAM: Wells Fargo brought Wachovia

I believe Citi is too big to fail and the government's stake will cause it to make every effort to fix it. A failure will cause even worst disaster than Lehman (They should never have let Lehman fail either, instead rescue it like AIG) I got out at C stock at $8 and instead brought Preferred and Trust Preferred (senior debt) - at least its good that I'm equal or higher (if conversion goes thru) than the government.

Feb 23 07:43 PM

[ca$htra$h:]

Where does the fear come in?

Do we need to be afraid of the market doing the necessary work that the market, and market alone, can and will do? If we can stop fearing the inevitable unfolding of events - which no one can do anything about - we will stop repeating the insane error of allowing the government to participate so forcefully in the market at all.

The really fearful part of your story is the way that The United States Government is written about as if it were any other corporate entity in the marketplace. Can we really accept this narrative? The unique thing about this entity is that it has the power to force any of you to turn over your wealth through taxation. This is the one thing that no other private entity in the marketplace has the power to do. So what is this entity which is muscling its way into every part of the once-free market? Why have we allowed it to gain so much power?

Remember: Paulson and Geithner have been presiding over the destruction of the dollar. Next time you have a fistful of dollars, get rid of the ones that say "Henry Paulson". We can retain a strong currency - at least for local exchange - if we recognize that the real, off-the-charts debasement of the currency began with Paulson. Let us, as users of our own sovereign currency, tell Paulson (and eventually Geithner) exactly what we think of Federal Reserve Notes that bear their signatures. They are nothing but trash. Refuse to accept them. Only accept notes signed by John Snow or before.

Feb 24 01:04 AM

[Green Eyes:]

constructe... I couldn't agree with you more....

As Obama himself said... "This is the beginning of the end.." - I about choked on my dinner! I couldn't believe that in all of the vast sea of english language he would choose that phrasing, among all things. It was PERFECT.

I will NEVER forget where I was and what I was doing when he uttered that phrase, I can assure you.

Feb 24 01:35 PM

[Doomer at L...:]

I guess the economic paradigm has to so irrevocably take a dump on everyone's face that finally and at last the populace sees that it ain't fixable. Highly intellectual types who have a few shreds of capital left will be the last to come to it. In particular, our elected officials, who are hell bent on feeding the terminally ill credit system. Hell, even if credit were to become easily available, would people dive in again? (probably).

It is disappointing to see the Man of Change, our President, so feverishly attempting to hold up the corrupt corporate entities that led us hungry rats down this trail, and using our kids' futures to do it.

Alternative approaches to address our dilemma (not SAVE it, but gently steer us into other avenues of being) are everywhere, but usually the proponents are labelled as nut cases.

Feb 24 01:49 PM