We are covering this as a rolling story. Links and commentary will be added all day. To keep from clogging the front page, all links and updates are after the jump.
The Citigroup deal is done and the details have been released. It's the Spanish Inquisition all over again as taxpayers are getting the rack, the rope and the shaft. Based on where Citi's stock is trading currently, taxpayers will be paying a 100% premium to convert preferred shares into common. Geithner and Pandit agreed to a conversion price of $3.25 per common share. Citi's stock is down 30% on the news and trading at $1.75 currently. First, the official press release from Citigroup.
It's more lemon socialism. The banks get the upside and and the taxpayers the shaft. The obvious question though is why would any of the existing pereferred holders convert at $3.25 when the common is trading at $1.75 this morning. Henry Blodget wonders the same thing.
For clarification, as it was struck last night, the deal does NOT yet involve any new taxpayer funds. It is simply an agreement and formula for converting our existing preferred shares into common in order to boost tangible common equity (TCE) at Citigroup. Though still not completely clear, it seems the rub of the deal is that Geithner has agreed that taxpayers will convert up to $25 billion of our preferreds into common ONLY if matched in conversion by private holders of the preferreds. And so we ask again, where is the incentive for existing private holders of the preferreds to convert at $3.25, when the common is 50% below tht price currently? Here's a snip from the Wall Street Journal this morning on the proposed deal:
"Under the deal, Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public and up to $25 billion in preferred stock bought by the government into common stock. The exchange, if fully executed, would leave the U.S. government with 36% of the bank's shares. Existing shareholders' stake would be cut to 26%. Shareholders will have to approve much of the common stock issuance."
Here's another snip from the same WSJ article that gets to the crux of the deal:
"It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said. The Treasury Department will match the private investors’ conversions dollar-for-dollar. That accounts for uncertainty in how big the government’s stake will be."
"The terms are onerous for both sides. While common shareholders will see their stakes severely diminished, preferred shareholders are being asked to swap their holdings for riskier common stock, whose holders are the first to get wiped out in times of trouble.
Neither has much choice, however. To motivate investors to sign up, Citigroup is suspending its payment of dividends on preferred stock. And to spur common shareholders to vote for the deal, Citigroup will issue securities to preferred shareholders that agree to the swap that let them buy common stock for a penny a share if shareholders don't approve the deal."
Here's what Bloomberg has to say on the deal:
GE just dropped a bomb on the markets.
If you haven't seen it yet here is Option Armageddon on leverage ratios of all the big banks. GE is included of course. Their ratio is 140:1. Ouch.
The best rating firm out there Egan-Jones said this morning that Bank of America will be next.
Must read on the terms of the deal plus a primer on convertible preferreds.
4:25 PM The market is closed. Citigroup finished the day at $1.50 per share so taxpayers lost approximately $14 billion on the new Citi deal. Here's how the numbers go. We had $25 billion in preferred shares which we converted (or will be converting) into common shares at the price of $3.25 per share. Thse shares are now worth $1.50 so we have lost $14 billion of our $25 billion in one day, theoretically.
The entire question leading up to this announcement was how much preferred holders would be asked to pay for their new common shares. This entire charade was merely a clever ruse for Geithner to give $25 billion of your kid's cash straight to Citigroup. Citi's common shares will soon be worthless as will the entire original $25 billion investment.
PLEASE CALL THE US TREASURY and tell them how you feel. 202-622-2960 USTreas.gov
updated with more links on Citi, GE and BAC.