Revisiting the Citigroup-SEC Story: $123 Million, Really?

Includes: C, GS
by: Kid Dynamite

Last month I wrote about the strange disparity between Citigroup's (NYSE:C) $75 million SEC settlement and Goldman Sachs's (NYSE:GS) $550 million settlement. Please read my prior piece on the subject, but the bottom line is that Citigroup misled investors as to the risks on $43 billion in subprime CDOs.

The settlement was subsequently rejected by a judge, and today the NY Times gives us an article about judges who have rejected SEC settlements lately.

What I found interesting about the NY Times article was the claim:

The S.E.C. calculated that the company realized an economic benefit of up to $123 million from its misrepresentations, but proposed to settle for a fine of $75 million.

Now, how did they come up with that number? It's a little hard for me to reconstruct exactly when Citi's writedowns occurred, and when they raised capital, but here's what I've scrounged together quickly:

During the first quarter of 2008, Citigroup issued $12.5 billion of 7% convertible preferred stock in a private offering, $3.2 billion of 6.5% convertible preferred stock in public offerings, and $3.715 billion of 8.125% non-convertible preferred stock in public offerings.

In the second quarter of 2008, Citigroup raised $8.0 billion of capital through public offerings of non-convertible preferred stock and issued approximately $4.9 billion of common stock.

In total, the Company raised $32.3 billion in capital in private and public offerings during 2008, excluding issuances to the UST under TARP. See Note 21 on page 172 for further information.

Now of course, Citi was disclosing larger and larger writedowns this entire time, so it's not as if the effects of the $43 billion in mis-disclosed assets that were the subject of the SEC settlement were entirely unseen by this time.

So, let's get back to the "economic benefit" cited in the NY Times article, which was said to be "up to $123 million." Does this seem strange to anyone else, considering that they raised over $32 billion in capital in the first half of 2008, and another $7.5 billion at the end of 2007?

Isn't it perfectly reasonable to assume that their economic benefit from their non-disclosure of risky assets could have been a whole lot more than $123 million, considering that investors may have demanded a higher return on their nearly $40 BILLION in capital investment had they known the extent of the exposures? I'd love to know how that $123 million number was arrived at.

Disclosure: Author is long C