Citi Zooms Up as the Dow Dives

It has been a very interesting day today. A little depressing perhaps, but interesting. In the morning there was news that the US Government will convert its Citi Preferred Stock which it bought for a cool $45 billion dollars a few weeks ago into a 40% equity stake.

The total market capitalization of Citi was about $11 billion dollars today, so if you or I had – $4 billion, and wanted 40% stake in a bust bank – we could do that with only one – tenth the price the government wants to pay.

A lot of newspapers reported in the morning that this deal will not involve any additional taxpayer money – which is true, but for some reason they didn’t report that – at today’s prices, the deal can be done at – one-tenth the price.  In fairness to them, they were reporting a rumor, and did say that the stake would be between 25 and 40 percent.

The difference between Preferred Stock and Equity – is that Preferred Stock doesn’t carry voting rights, but the company needs to pay a fixed dividend on it. On the other hand, common equity stock carries voting rights but doesn’t carry any fixed dividends.

The news (or rumor?) of government buying out 40% equity stake and diluting the voting power of existing equity shareholders should have sent Citi’s stock down several percentage points, but since the government planned to buy it for much more than what it was really worth – the stock went up by 11% today.

At some point during the afternoon, Mr. Market got really somber and went down to levels it had not seen in 12 years. Dow hit 12 year lows today and saw a sudden fall towards the end of trading.

The fact that the there was a joint statement from the Fed, Treasury and other Government organizations that was really hard to decipher and vague didn’t do any good to Mr. Market’s mood.

I tried to read and understand the statement several times but I must admit – I don’t understand what the Fed means. It seems the arrangement with Citi would have shored up its capital ratios and made it appear stronger on – books of accounts.

But, how it helps to solve the problem of toxic assets or easing the credit markets – I have no idea.

Then in the evening Fed  issued another statement to the effect that a strong and resilient financial system is necessary for the economic recovery. What effect it happens on the markets – we can only find out tomorrow.

At some point after the markets closed, Reuters reported that AIG is expected to announce a fourth quarter loss of $60 billion! Its lawyers are contemplating bankruptcy, if the government doesn’t bail them out.

AIG traded at about 50 cents today and the total market capital of the company was about $1.4 billion. Just to put things in context – the government has put in $150 billion in AIG during the last few months, and it may well need to put billions more.

But if it puts more money in AIG – that will be like putting good money after bad, as 60 billion is a really really huge number and no company has made such a big loss in just three months ever.

But I’d be really surprised if the government doesn’t throw good money after bad – no one wants another Lehman at this point in time.

As interesting days go – it doesn’t get any more interesting than this, but I hope we don’t see a repeat of it any time soon. But, that may well be a hope against hope.

4 thoughts on “Citi Zooms Up as the Dow Dives”

  1. Yeah I am getting tired by all this too. Here is a quote from Nobel Prize Winner Joseph Stiglitz that sums it up nicely –

    “We are bailing out bankers, and cutting back on our social security system”.

    “The amount of money going down the drain without showing anything for it is staggering and we’ve gotten nothing for the billions spent on TARP.”

  2. How do you lose $60 billion in one quarter! The incompetence is staggering. AIG is a dead man walking it sounds like. I’m getting tired of the rollercoaster ride, I don’t need spectacular returns. Slow and steady is fine by me!

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