US Stake in Citi Won’t Fix a Darn Thing
February 24, 2009 · Posted in Business
Reuters writes New U.S. stake in Citigroup may not calm doubts:
Even if the government took a large common equity stake in Citigroup Inc, worries would likely persist about the bank’s ability to absorb soaring losses in a deepening recession.
The third-largest U.S. bank by assets is in talks with federal regulators on a plan for the government to increase its stake, a person familiar with the matter said. Converting $45 billion of preferred stock, which the government obtained last fall, to common stock is one of many options, the person said.
An agreement could be announced Monday or Tuesday, CNBC television said.
Citigroup shares rose on Monday after the White House repeated that President Barack Obama believes keeping banks in private hands is “the best way to go.
U.S. bank regulators, meanwhile, said they stood ready to provide more capital to the sector and keep “systemically important financial institutions” viable.
But investors remained worried that losses from credit cards, emerging markets, trading and toxic assets could overwhelm Citigroup Chief Executive Vikram Pandit’s efforts to restore the bank’s fiscal footing. Analysts do not expect the New York-based bank to be profitable in 2009 or 2010.
Converting preferred shares to common equity “helps their capital ratios but it doesn’t help their problem assets,” said Walter Todd, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. “If Citi were out of the woods, the stock would not be at $2.”
The government plans on Wednesday to subject banks with more than $100 billion of assets to “stress tests” to decide which need more capital. Citigroup ended 2008 with $1.95 trillion of assets.
Citigroup shares closed up 9.7 percent at $2.14. They earlier traded as high as $2.48, but gave up some gains as broader indexes fell.
One needs to wonder how many more times it needs to be pointed out until people realize that Citigroup is dead:
Now regulators are discussing a conversion of $45 billion from preferred stock into common stock. How is this supposed to solve any structural problems? All that is behind this move is that Citi doesn’t want to pay the preferred dividend to the taxpayer anymore. Kiss the idea goodbye that taxpayer money invested will be recovered in any way. Citi’s common stock market cap is at around $10 billion now. A $45 billion conversion of preferred into common stock will all but wipe out common shareholders. Citi’s shares will follow Fannie Mae and Freddie Mac’s leads and turn into penny stocks.
In reality the company’s common stock isn’t even worth $0.00. I have explained this so many times and it can be read up on in the links I posted above. So I won’t get into it again.
How does any of this clean up Citi’s balance sheets?
How does any of this help investors trust that assets are marked to fair market value?
How is any of this supposed to restore trust in the US banking system?
How are we supposed to get credit flowing again if the banks’ balance sheets are full of garbage and people don’t trust banks with their savings?
How have any of these policies helped avert the continuous decline of the US economy?
How does the taxpayer get anything out of this?
To hell with Citi. Let them go bankrupt and be done with ongoing postponements of the inevitable.
The source of the crisis is that in response to the most irresponsible monetary and fiscal policy, US consumers and government borrowed too much, spent too much, and saved too little, setting in motion The Business Cycle via Credit Expansion and creating an environment of capital consumption. Nothing of what the government is currently doing even remotely addresses these issues. To the contrary, it continues and aggravates the irresponsible habits of the past. Big government is getting bigger by the day. Just as it has been for the past decades, with no change in sight under the Obama administration.