At yesterday's Citigroup
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
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: