This week Citigroup (C) announced plans to raise up to $19.6 billion in new capital. This is being done to provide the means to repay $20 billion TARP money to US taxpayers. Coordinated with the repayment, the U.S. Treasury announced plans to sell up to $5 billion of the bank’s shares, which would reduce the government's stake in the bank to less than 30%. The government currently owns 34% of Citi. This was discussed in an article by Justin Baer at ft.com (here).
But yesterday afternoon the U.S. Treasury announced it was canceling its sale because Citi is selling stock at $3.15 a share, lowering the price below what the Treasury is willing to accept. C traded after hours yesterday (Wednesday, 12/16) at $3.21, down 18% from last Friday's close of $3.95. According to Francesco Guerrera, Henny Sender and Andrew England, writing at ft.com (here), the U.S. Treasury paid $3.25 for the shares and would take a loss at the offering price for the new shares. The Treasury stated they would not be selling any stock during the next three months, but indicated there were still plans to sell stock later in 2010.
In related news, Adia, the Abu Dhabi Investment Authority, has filed an arbitration claim for at least $4 billion against Citi. Adia claims that a November, 2007 investment of $7.5 billion in C convertible preferred stock was subject to material misrepresentation. Guerra, Sender and England have the following regarding the Adia action:
People close to the matter said Adia’s unusual move was driven by the losses it stands to suffer under the original investment, which requires it to buy shares at $31.83 each, and frustration at a lack of contact with top Citi management.
In a previous post (here), I had assumed that Adia had the option to convert. If they have the obligation to convert, that would explain why Adia is so upset.
All this is taking place against a backdrop of huge reported losses over recent quarters. As reported here, C used asset sales to significantly offset $22 billion in losses over the five quarters ending in 2Q/09. In 3Q/09, the latest quarter reported, Citi hardly made a dent in that with net earnings reported of $101 million. But when you look at the cash flow statement, the quarter saw a negative change in cash and cash equivalents of $433 million, more than four times the net earnings. Obviously the earnings are due to accounting gains and increased asset values, not from the cash flow.
And on top of all this flailing, there is a multi-billion dollar tax break that Citi has wrangled which Michael Corckery at The Wall Street Journal Deal Book (here) calls the final Citigroup bailout. There is some debate about whether that tax break might be removed. If that occurred, could the flailing become fatal?
I have speculated before that Citi can not survive unless it breaks up. All the current happenings have not diminished the odds on that happening.
Disclosure: Author holds no positions in C.
