Citigroup's Wishful Thinking

At yesterday's Citigroup (NYSE: C  ) annual shareholder meeting, CEO Vikram Pandit tried desperately to follow in the footsteps of Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM  ) , vowing that his bank would repay taxpayers in full. "Every dollar with interest," he said.

That's encouraging, but highly unlikely. Especially for Citigroup.

You see, Citigroup is set to convert $25 billion worth of taxpayer-injected preferred stock into common equity. Taxpayers will get a 36% ownership stake after the conversion, which will come in the form of the same common stock you and I can buy on the open market.

That makes repaying TARP much trickier than simply writing a check, as other banks have proposed. For one thing, taxpayers are taking a massive haircut on that conversion. Citigroup currently has a market cap of about $17 billion, valuing that 36% stake at roughly $6.1 billion. Is it just me, or is $6.1 billion somewhat less than $25 billion?

Therefore, Citigroup common shares will need to be a four-bagger from today's prices before taxpayers can hope to break even. While that's not outside the realm of possibility, it still seems like quite a stretch -- especially since shares already rose over the past month.

I have a feeling that similar situations will become the norm. For banks such as Bank of America (NYSE: BAC  ) that still likely need additional capital, preferred-share conversions are a quick and easy solution. What's more, the Obama administration has hinted that converting preferred shares for common stock might be the next big step in shoring up the banking system.

So while big share conversions are a viable solution to stabilize and recapitalize banks, they do make repaying taxpayers in full a sticky issue, tied exclusively to stock market values. Alas, dear taxpayers, there's no such thing as a free lunch.

Further fully valued Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


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  • Report this Comment On April 22, 2009, at 12:24 PM, InvestwiselyA wrote:

    You are valuing this at current Market Cap and I see your point. Although if C continues to beat expectations and be profitable the eventually market cap will go up and citi will have sufficient funds to pay back. 1/5th of company shorted has severely under-valued the stock price, let's hope that mm cover and provide a decent fair price to what citi is valued at. If a true massive short squeeze happens, pending Hedge Funds/MM players - I certainly see that C has upward momentum atleast 2 to 3 times it's current share price. Clearly if the value in long term goes up 3 times the current price, it will be in good shape to pay back tax payer dollars with premium Ofcourse pending no more Unforeseen situation arise.

  • Report this Comment On April 22, 2009, at 12:52 PM, Lehar1 wrote:

    Your math is wrong incorrect. With Citi at $3.15, govt's TARP preferred is worth close to par, i.e., to $25bln. The gov't isn't getting 36% of $17billion; it's getting 36% of ~$68billion, which is what the current market cap of Citi is once you take into account all the new common shares that are going to be issued (an additional ~$16billion shares by my math). Based on where Citi was trading a few days ago (well above the gov't's $3.25 conversion price) you could say tax payer had made a paper profit of many billions of dollars.

  • Report this Comment On April 22, 2009, at 1:16 PM, itzscott wrote:

    The author is an idiot who is writing with an obvious bias!

    To think that one of the largest banks in the world that's currently trading in the $3+ range can't easily become "a 4-bagger" relatively quickly as their balance sheets clean up and continue to purge toxic debt is laughable.

    This was once trading in the $50 range. To think that Citigroup won't rise to $12 under the pressures being brought upon it to get it's act together by both the government and its shareholders is either extremely naive or suspicious in the author's intent.

    Citi actually IS too big to let fail. We learned that lesson the hard way with Lehman Bros.

    This short-sighted author (no pun intended) has no business writing financial columns.

  • Report this Comment On April 22, 2009, at 2:59 PM, ttboydxb wrote:

    C is insolvent, "she's a goin down captain!"

  • Report this Comment On April 22, 2009, at 3:31 PM, hudsondusters wrote:

    Binary possible outcome. 0 9not happening, as government will save), but close to it, or easily more than a 4 bagger, given time. Damn have we gotten stupid. C was "insolvent" in 1980, 1990, etc. We used to not panic like this. More hedge fund fast money and pointy-head doomsayers.

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