US Treasury – Putting the ‘Citi’ in 'Citi'zen
Today Citigroup (C) announced the final results of its program exchanging preferred stock for common. In total, C is exchanging $58 billion of preferred stock for common, including $25 billion of US Treasury’s TARP preferred. The US Government will own about 34% of Citigroup’s common stock when everything settles.
The tender offers expired last week and will result in the total number of common shares jumping from about 5.5 billion to about 22 billion.
The US Government’s conversion price was $3.25. $25 billion/$3.25 = about 7.7 billion shares issued to the Treasury. The Census Bureau’s population clock shows the US population at 307 million people. Congratulations! That’s about 25 shares of Citi for every US citizen!
Remember last fall when politicians and pundits were telling us TARP was going to make money for the taxpayer? At today’s closing price, TARP has lost $846 million on the C conversion deal. And that’s in a market that’s been up. Whew, good thing the government doesn't have a stake in GM, Chrysler, AIG, FNM or FRE - oh, wait.
The government still holds over $20 million worth of Citi preferred paying an 8% dividend. Reports indicate the government would consider converting that into common if C gets into trouble again. The TARP warrant for Citi shares wasn’t part of the share conversion, but the anti-dilution clause should have increased the number of shares and/or lowered the strike price – I didn’t see that addressed in any of the news articles.
I really don’t understand how this conversion improves the capital ratio; it doesn't seem like much more than an accounting change. It does help Citi’s cash flow since they’re no longer paying dividends on the preferred they converted. But, no new money rolled into Citi’s coffers as a result of the share exchages. Other than the reduced dividend payments, this does nothing to help stem losses or provide a cushion of funds to absorb future losses. Citi will have the same cash balance the day after the share swap as they would have had without the conversion.
Disclosure: Apparently I’m long roughly 25 shares of C.