Citigroup Makes a Good Move: Preparing to Buy Out Uncle Sam

The WSJ reports that Citigroup (C) wants to issue up to $5 billion of equity to repurchase a corresponding number of shares from the U.S. Treasury. This is a great idea that benefits both taxpayers and Citigroup’s shareholders. Citi does not have enough common equity capital to repurchase the government’s shares outright. Yet, if it issues new common equity to reduce the government’s stake, no capital is lost.

Citi’s shareholders should be cheered that managers are taking steps to exit the government ownership. Taxpayers should be eager to lock in some of their paper profits on the Citigroup stake. On the $25 billion investment that was converted into common shares, taxpayers are looking at paper profits of over $11 billion on the 7.7 billion shares of stock and the 210 million warrants that they received for that cash infusion. It would be hard to quickly reduce this stake through open market sales alone without pushing down the share price. Yet, a larger underwritten sale of the government shares may be possible without a large negative impact on the share price. Typically, seasoned equity is issued at a two to three percent discount from the previous day's closing price.

My solo and joint research shows that banks that have too little common equity make bad lending and investment decisions. Yet, as long as Citigroup is reducing the government’s common stock stake by issuing an equivalent amount of new privately held common stock, regulators and taxpayers have nothing to worry about.

Comments

[75 Year Old...:]

Are You Serious?? , that line of logic says why not issie 10 Billion in New shares , I guess YOU Don't Understand DI LUSION , The Gov can't Print Prosperity and Companies can't Dilute there way Out of debt ! Business 101 !

Sep 16 07:26 AM

[User 486927:]

"The WSJ reports that Citigroup (C) wants to issue up to $5 billion of equity to repurchase a corresponding number of shares from the U.S. Treasury. This is a great idea that benefits both taxpayers and Citigroup’s shareholders. " how would that benefit taxpayers or citi shareholders?

Sep 16 07:58 AM

[aaavoid:]

So Citi issues new shares for new public shareholders to buy($5 billion of them) and use the $5 billion proceeds to buy back government's shares in Citi. How does that benefit the shareholders? I still can't see it? good move? How so?

"Taxpayers should be eager lock in some of their paper profits on the Citigroup stake."
Many people including John Paulson believes Citi is a $6-7 stock based on book value, if that is correct, why not wait another year or 2? From current share price of 4.12 to 6 or 7 dollar would mean taxpayers make additional 50-75% profit. Why not just hold the stocks? How do you know taxpayers are eager to lock the profits? They are screwed anyway, might as well hold out for additioanal 50-75% profits.

Sep 16 08:30 AM

[Andy1234:]

I don't think it would dilute the shares....you are simply transferring the shares to new owners....not creating new shares correct?

You issue X amount to new holders and buy out existing X amount from the government.

Sep 16 08:36 AM

[vreporter:]

I think you're confused about what's right and what's good. What's good would be determined by the share price in the near term. need I say more?

Sep 16 08:39 AM

[Angry Banker:]

I believe Citi is considering issuing common stock to raise capital to buy out part of the government's stake in preferred stock. Since they would no longer have to pay dividends on the preferred, then this would be good for stockholders because of less cash outflow required to service the preferred shares. It's good for taxpayers because it gets some of their "investment" back. In the short term, it doesn't do anything else for Citi because the government still owns a huge stake and will still be micromanaging the bank day to day.

Sep 16 10:07 AM

[CoverIsBetter:]

Is this $5 billion for buying out the government, the same that will come from the bond auction mentioned here today : ftalphaville.ft.com/bl...

If so, this should not affect share dilution for the common stockholders, right?

Sep 16 10:47 AM

[Linus Wilson:]

CoverIsBetter: The plan floated is a joint stock sale. Citi raises $5 billion in common stock from private investors and buys back $5 billion from the government. The benefit for Citi's shareholders is less government meddling. It should be promising that Citi's management at least has a plan to shed government ownership. Citi's capital ratios are too low for regulators to allow share buybacks financed with debt. Citi is raising debt right now because they don't want to have to apply for an FDIC debt guarantee extension.

Sep 16 11:43 AM

[waveraider997:]

I think what C does is good. I have maintained a significant position and taken profits from 1.12-4.24. I have also decided to increase my position in Citi for long term. C is an excellent operation. I think the former leaders got a litle to aggressive and didn't know what they went into. The current leaders have business and Main street knowledge of the business they are in (BANKING). I am just in question of the reverse stock ratio's because that will do 2 things. If Market Price doesn't increase a touch above current level.s Investors (instituitional and indiv) will not increase there holdings and this will mean price will remain at the levels and they will have a return that is less than 3-5%. Which may happen. I hope Citi does trade a little lower for a better price to add on to profits and the technical indicators show that. In addition, I do not see Citi buying back stock for the next 4-5 years unless they have extensive growth in the emerging markets. US/EU markets are under consolidation for C. And producing returns is looking harder.

Sep 16 11:47 AM

[BIG-T:]

I'm not sure CITI's shareholders aren't better off with government looking over management's shoulder. They're the people that screwed the shareholders in the first place. I'll bet the first thing they will do is give themselves a big bonus and raise before paying dividends is even considered.

Sep 16 12:00 PM

[tgreen56:]

Linus. I dont see where you answered the question. Is this or is it not a $5 billion dilution? Will the $5 billion in stock be retired or will Citi's market cap just be increased by 5 billion. Yes or no. If yes how could that be good for the shareholder in the near term or even the long term. I agree with BIG T. All this will solve is Citi will get back to big bonuses and insane salaries which no doubt will be far greater than the interest Citi now pays the gov and the common stock holders will be left holding the bag once again. As a tax payer I would to see the gov get out of Citi ASAP but as a shareholder I would rather see Citi pay back the gov with profits not dilution.

Sep 16 12:29 PM

[Linus Wilson:]

tgreen56: A joint stock sale would have no effect on the number of common shares. Thus, it would create no percent ownership dilution. Yet, the transaction costs of selling stock does create some stock price or value dilution because you have to slightly under price the stock and pay your investment bankers for underwriting the issue. Nevertheless, I think those transaction costs are outweighed by reducing potential value destruction that can happen if the government prevents management from picking the most profitable business opportunities. Talented bankers and key clients will also flee the company if their is no plan to reduce the government's stake. The U.S. Treasury has been slow to auction the TARP warrants. I also believe that the U.S. Treasury will be slow to sell their Citi stake unless the managers at Citi come up with a plan to reduce the government's stake.

Sep 16 02:46 PM

[SmartMoneyJoe:]

So Citigroup, the huge New York bank, is being pressured into reneging on its $400 million deal with the Mets to plaster its name on the team's new stadium.

That's right, $20 mil per year for 20 years to call this baseball pleasure dome, which is arising beside the defunct Shea Stadium, "Citi Field."

The agreement has brought outrage because Citigroup received $45 billion in bailout aid from the federal government. The bank denies that any of this money has gone toward the stadium, but this is a facile deception: if it hadn't allocated the marketing funds so lavishly and foolishly, it would have needed $400 million less from Uncle Sam.

Giving federal aid indirectly to a bunch of smug, grossly overpaid athletes is more than I can stand.
----------------------...
Look after your pennies, and your pounds will look after themselves.
www.personalbudgetinve...

Sep 16 04:15 PM

[Cormack:]

Bank stocks and the BKX along with the broker-dealers are all exploding en fuego insofar as their price momentum of their common shares so as the S&P rips towards the pre-Lehman and pre-TARP areas of 1200, it will all make TARP, the Fed Chairman and the Treasury look like geniuses with those paper profits that continue to go higher week after week. Now, as TARP is repaid, is it appropriate for it to be perpetually re-appropriated as a new slush fund?

cormackcapital.wordpre...

Sep 16 08:12 PM

[Russ Krull:]

Linus,
The WSJ article isn't very clear whether proceeds from the prospective share issue would be used to purchase UST's common stock or the remaining preferred. This statement "Citigroup could use proceeds from a stock sale to redeem some of the preferred stock the Treasury is holding" indicates new capital would be used to retire preferred stock.

If the plan is to have UST divest some of the C common, wouldn't it be a lot simpler for Treasury to just auction the common rather than have C issue shares, then turn around and buy shares from Treasury? Same result, but fewer transactions.

Nice summary of a poorly written WSJ article.

Sep 16 08:40 PM

[greedcanbgood:]

I love how banks such as BB&T and USB are overlooked in all these comments/blogs. Let's see...outperformed peers in most metrics throughout this crisis, among the first to pay back TARP, no skeletons, no surprises and heck, USB is already talking about increasing its dividend. Go where the good management (and good future) is and go with these two....

Sep 17 10:22 AM

[DonFurio:]

It's called marketing. Did Citi overpay, well that's a different question, but that's their call to make. I love you are taking a positive, the US govt is up huge on their equity investment, citi is looking to help them reduce their stake at a profit, and instead focus on something relatively small. Yea, they have 45 Bil, but as you can see above, they will be paid back over the next few years, so relax.


On Sep 16 04:15 PM SmartMoneyJoe wrote:

> So Citigroup, the huge New York bank, is being pressured into reneging
> on its $400 million deal with the Mets to plaster its name on the
> team's new stadium.
>
> That's right, $20 mil per year for 20 years to call this baseball
> pleasure dome, which is arising beside the defunct Shea Stadium,
> "Citi Field."
>
> The agreement has brought outrage because Citigroup received $45
> billion in bailout aid from the federal government. The bank denies
> that any of this money has gone toward the stadium, but this is a
> facile deception: if it hadn't allocated the marketing funds so lavishly
> and foolishly, it would have needed $400 million less from Uncle
> Sam.
>
> Giving federal aid indirectly to a bunch of smug, grossly overpaid
> athletes is more than I can stand.
> ----------------------...
> Look after your pennies, and your pounds will look after themselves.
>
> www.personalbudgetinve...

Sep 17 11:26 AM

[Nettligent:]

Reverse stock split and issue more shares will only dilute stocks. Citigroup's management and Board of Directors need to replace with professional and integrity.
Both Taxpayers and Citigroup’s shareholders are the victims and got punish so bad.

Sep 17 03:07 PM

[a fat panda:]

Up huge? You are looking at one stock in the portfolio.

With all of the money that the government makes maybe it will be able to fund the FDIC for all of the small banks that have been driven-out of business by the government subsidizes to Citi. Maybe we can start selling some of the assets held by the Fed and the GSEs. Maybe the government will be able to buy some accountants to explain where all of the money that was put into AIG.

And maybe we will not have to lend them money at a non-existant rate against crap assets with all of the money that we have made. Did you see the last round of the TAF fundings? This temporary program is still around nearly 2 years later, and they are cutting it from 100 billion to 75.


On Sep 17 11:26 AM DonFurio wrote:

> It's called marketing. Did Citi overpay, well that's a different
> question, but that's their call to make. I love you are taking a
> positive, the US govt is up huge on their equity investment, citi
> is looking to help them reduce their stake at a profit, and instead
> focus on something relatively small. Yea, they have 45 Bil, but as
> you can see above, they will be paid back over the next few years,
> so relax.

Sep 17 11:20 PM

[msgtb:]

I hope sell enough shares to pay us back before they go bankrupt in the next couple of years. They were and are still insolvent but for the money of the U.S. Taxpayers

Good luck and good trading

Dave

Sep 18 06:19 PM