U.S. to net more than $8 billion in sale of Citi stake

[ProSense]

U.S. take if it sells its Citi stake to settle cost of bailout: $8 billion

By David Cho
Washington Post Staff Writer
Saturday, March 27, 2010

Among the banks that rule Wall Street, Citigroup got a bailout that was bigger than the rest. Now the company is about to pay a king's ransom for its federal rescue.

The Obama administration is making final preparations to sell its stake in the New York bank, according to industry and federal sources. At today's prices, sale would net more than $8 billion, by far the largest profit returned from any firm that accepted bailout funds, and the transaction would be the second-largest stock sale in history

On paper, the government's 27 percent stake has grown in value to $33 billion. The size of the deal in the works has Wall Street buzzing. Only the stock offering by Japan's Nippon Telegraph and Telephone, which raised $36.8 billion in 1987, was larger, according to Thomson Reuters.

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The windfall expected from the stock sale would amount to a validation of the rescue plan adopted by government officials during the height of the financial panic, when the banking system neared the brink of collapse. A year ago, Citigroup's stock hovered around a dollar a share, and the bank's future seemed in doubt. On Friday, the stock closed at $4.31.

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[ClarkUSA]

1. Never doubted it. Nice to see the naysayers proven wrong. Too bad they'll unrec this truthful OP.

Bookmarked for future schadenfruede.

[Skink]

2. Buy low sell high. Good thing they are selling now.

[Frustratedlady]

3. But, will the MSM talk about this as much as they have about Cantor

having a bullet "through" HIS window?

Will we even hear about it on the news?

[Yavin4]

7. The Gulf of Cantor n/t

[optimator]

4. Citi is still too big too fail

which makes this sale irrelevent.

[Tarheel_Dem]

5. If Citi is, as you say, "still to big to fail", why is this sale "irrelevant"?

As long as we taxpayers recoup our funds, and make a profit, what the hell difference does it make to you? After the sale, Citi will either sink or swim on it's own. It's a win-win.

[Cha]

11. +1

[Phx_Dem]

21. Not exactly true. It is too big, but it's not too big to fail, by itself.

If Citi were to fail by itself, it would not be an economic catastrophy. It was the prospect of the biggest banks all failing together that would have brought up to the bring of economic armageddon.

[elias7]

6. Don't see how Citi is paying a king's ransom

If they were buying back the govt's shares, then they would be paying for it. But Govt selling to public and private buyers is really us paying for the bailout and Citi getting it for free. Somewhat clever is you ask me.

[harkadog]

12. Right. The reporter obviously doesn't understand stock sales.

I think it was dumb by the feds to announce this in advance. The notice of such a large sale will depress the stock price and the feds will not make the money they could have.

[Lucky Luciano]

15. Everyone knows this sale is coming. No real traders will be fooled

by a surprise announcement. I personally think the feds should bleed 1-200MM shares per day through normal trading until the 8B shares are sold - Citi does trade around 750MM shares per day. If the government tries to sell it in one big slug, the offering price will probably come at a 7-8% discount to the previous close.

[harkadog]

22. Look like you were wrong

On Monday's announcement the price of Citi was driven down 3% while the market had an up day. http://www.marketwatch.com/story/banks-open-flat-treasury-to-sell-citi-shares-2010-03-29?siteid=yhoof

[Lucky Luciano]

23. please - we all knew this was coming. It was astonishing that the

price was going up. Easy short term short.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=4322423&mesg_id=4322478

[Lucky Luciano]

14. It does cost Citi $8B in the following way:

Those common shares the government has used to be preferred shares that were converted to common. They converted so Citi could preserve cash by not paying the dividend for the preferred. Had Citi been able to raise $25B in cash through their own issuance of stock, they could have used that to buy back the preferred shares. Instead there is an extra $8B of dilution.

[PBS Poll-435]

8. Yep

They should hold out until $8.00/share, though. (And really piss of some people.)

[woolldog]

9. I've been buying a lot of call options on C for a month or so

and they've made me a lot of money. The stock has gone up about 33% in the past month. As the stock passes the $5 threshold that opens the way for more institutions to begin accumulating it, as many don't hold stocks with a value below $5. A lot already do hold Citi shares, but compared to many banks they are underrepresented as Citi stakeholders. Hedge funds over the last few months have been net accumulators of the stock. And looking simply at Citi's valuation (e.g., lower price to book ratio than their peers) compared to other banks Citi is undervalued. So this is an attractive price for an individual investor to get in on. I'd highly recommend it to all of you!

[elias7]

10. I'm option heavy as well

I think hedgies are in it because they sense govt won't let Citi off the hook for repayment of our money by selling 7.7 billion shares to the public. I think they're thinking buyback.

[Lucky Luciano]

16. Buyback? I doubt that - the feds want Citi to be well capitalized.

They will not have Citi issue shares to raise capital just to pay the government for its stake...and they certainly will not have Citi pay cash for the shares with cash on their balance sheets. Interesting that people would play Citi options. I would have probably just bought the shares without paying for the vol.

[woolldog]

17. Leverage is why I prefer the options

When I bought the Citi $4 June calls they were selling at .10. The stock was selling at around 3 dollars and some change. An investment of $2,000 in those calls buy 200 contracts at $10 per contract.

That allows me to control 20,000 shares. If I had used that $2,000 to simply buy the stock I could only contol about 650 shares or so.

Assume a run up to $6.00 by June which is very plausible now. Each contract would be worth at least $2.00 per share, or $200 per contract. Plus some time premium. The $2,000 investment is now worth at least $40,000. If I had simply bought the shares my $2,000 investment would only be worth $3,900.

every dollar above $4 the underlying stock goes up in this scenario makes $20,000 on a $2,000 investment. If the stock goes to $7.00 the position is worth 60k. $8? 80k. $9? 100k. All from a 2000 initial investment. If you simply bought the shares and the stock ran up to $9. You'd only have $5,850, which is nice but it's not 100k.

You simply can't get those kinds of exponential return buying the underlying stock. I'm also in some of the Jan 2012 $ 5 and $ 7.50 calls so i'm even more leveraged. I'm happy to pay for volatility when I expect it to increase.

[elias7]

19. Right with you

Got me June 5's and 6's, Sept 5's and 7's, Jan11 5, 7.5 & 10's and Jan 12 5&7.5's. All in....good feeling....Couldn't buy enough shares, so...went for more leverage to increase my share count in the long run...

[elias7]

18. Citi's overcapitalized, highest tier 1 ratio in town

Citi has $190 bil in cash... Some of the biggest hedge fund folks have recently bought huge stakes. There are 28.5 billion shares in float, before this past year they had only 5 billion shares. Citi will either reverse split or buyback, otherwise they'll never get their share price steadily above 5 where large institutional buying starts. Reverse split at this point...brink of positive earnings & government selling its stake....sign of weakness. Shorts would have a field day. Pandit said they did not need to raise capital through secondary share offering in December to pay govt back. Said they had enough cash.

Interesting you say not to play options. Smart money says LEAPS jan12 $5 calls are golden. But what do I know.

[Lucky Luciano]

20. Maybe I am just cynical when it comes to retail option

players who just want leverage.

Bear in mind the high tier 1 ratio makes it hard to generate real PnL. Also, Citi still has backstops from the government - that is one reason I do not think the government would simply let Citi buy back its shares - they want them to have loads of cash on their balance sheet. Politically it would be dangerous for the government to let Citi lever up through buying back the shares.

I do expect a reverse split to happen. It makes good sense for them to do it at this point. Remember also that any hedgies who may have gotten in as they anticipate mutual fund buying after Citi gets over five bucks (stably over $5) will be selling in to this buying, so that can help to mute a massive runup. I don't see Citi being much over $7.50 any time in the next two years.

...and I never said not to play options. I asked why someone preferred to play options - I already view Citi as a call option on the economy. I do a lot of work in options trading and have no issues with options. My focus is more on index options and some of the technical trades that can come about as a result. I also have some VIX futures strategies that are purely technical. I don't play options for leverage though. I trade more to make money on the vega/gamma rather than the deltas that the leverage players look for.

With those C Jan 12 5 calls beware of the affects of the vol compression that could come about as the economy improves. Those long dated options have a lot of vega in them that you can lose out on as the economy improves and Citi's stock approaches $5.

[boppers]

13. It was never a handout, or a giveaway.

The wrong words were used, which gave people the wrong idea about what was going on... this was a speculative investment program, resulting in profits (or, at the minimum, by legislation) a break-even.