Abu Dhabi to the Rescue!
Late Monday night, the WSJ reported Citigroup (NYSE:C) will receive a $7.5B cash infusion from the governmental investment arm of Abu Dhabi [ADIA]. Recall that in 1992 -- the last credit cycle problem, and much deeper recession than 2001 -- it was Saudi Prince Alwaleed who rescued Citi by provided funding.
If you thought Citigroup was not in deep trouble, than check out the terms of the deal:
• The investment authority known as ADIA will become one of Citigroup's largest shareholders, with a stake of no more than 4.9%.
• ADIA will receive convertible stock in Citigroup yielding 11% annually.
• Shares are required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011.
• The stake will exceed that of Saudi Prince Alwaleed bin Talal, long known as one of Citigroup's largest shareholders.
How's this for ironic: Citibank has essentially become a sub-prime borrower -- only without the advantages of teaser rates!
Here's the best part of all: Futures skyrocketed on the news, and as I am typing this, the Dow is indicating a plus 120 points for the open. Yeah! Rescue plan! Things are so awful, we are going to get a Fed cut -- Whooppee!
I enjoyed Bill King's take on the matter:
"Given the state of the US and global financial system, the likelihood that known ills are only the proverbial tip of the iceberg, the record leverage, trillions of derivatives, an economy in or near recession and a deteriorating housing market that is already the worst since the Great Depression, if one is not now negative, it’s hard to conceive any non-violent scenario that would induce negativity.
The US and global financial system ills are on going, extreme and largely unknown and unquantifiable; plus the Fed is boxed by a terminal dollar and record debt. The Fed realizes that further rate cuts, like the past cuts, did NOTHING to alleviate problems and instead exacerbated problems by crushing the dollar."
The timing is actually quite perfect: Markets are deeply oversold, with several indicators suggesting a bounce was overdue anyway. In a piece titled "The Lonely Bull's Case," my friend Guy Ortmann wrote Monday that AAII poll, Equity Put/Call ratio, SPX Trailing P/E, IBES Valuation Model and the 21 day Overbought/Oversold Oscillator are all at levels that suggest a buying opportunity.
I only disagree about the duration -- Guy thinks it will have legs, and I think the pop will be a selling opportunity . . .
Citgroup, 1 year daily
graphic courtesy of Stockcharts
Abu Dhabi to Bolster Citigroup With $7.5 Billion Capital Infusion
Government Investment Arm To Become a Top Holder, With Up to a 4.9% Stake
WSJ, November 27, 2007; Page A3