Felix Salmon

How the Citi stock offering flopped

Felix Salmon
Dec 17, 2009 14:37 UTC

The Citigroup secondary offering yesterday, which went much worse than planned, is a prime example of the difference between primary and secondary markets. A lot of investors simply assume without thinking too much about it that a rising stock price is always a good thing for the company in question, and they’re right to do so. But there are two kinds of stock price, and sometimes it can be hard to tell the difference.

The first type, which is based on perceived fundamentals, is the price that investors are willing to pay to own a stake in the company over the long term. The second type, which is based on markets, is much more speculative, and is fundamentally a bet on what other people will be willing to pay for the stock in the short term.

If you have a type-1 stock, it’s pretty easy to sell new stock at or near the secondary-market price. If you have a type-2 stock, however, it can be very hard. And a lot of people looking at the rise in bank stocks since March were wondering, in the back of our heads, how much of it was momentum trading and speculation, and how much of it was based on fundamentals.

Certainly a large part of it was speculative — a large part always is. Speculators are short-term liquidity providers, but you need long-term fundamental investors to represent a significant share of the market in order to be sure that the share price won’t collapse overnight. One of the tell-tale signs that the dot-com boom was a bubble was the tiny free floats on some of the most high-flying stocks: they might be up enormously, but that was only because the IPOs had been minuscule, and there was a mad rush for the very small number of shares available to the public. When those companies were reluctant to try to cash in on their soaring share prices by selling off more of their stock, it was a sign that the inflated capitalizations weren’t real.

Similarly, today, shares in AIG can bob around in significantly positive territory for as long as they like, but there’s no way that the company could ever get a secondary stock offering away.

Which brings us back to Citigroup. Eric Dash explains what happened:

Badly misreading the financial markets, the company struggled on Wednesday to raise the money it needed to repay its bailout funds…

Citigroup officials maintain that they did a good job considering the tough market conditions and should be lauded for pulling off the largest equity offering in American history. Some analysts have their doubts.

Shouldn’t those officials have considered the tough market conditions before they made the decision to attempt  the largest equity offering in American history?

At least now it’s a bit more obvious why Vikram Pandit couldn’t make his scheduled meeting with the president on Monday: he really was desperately trying to drum up interest in this share sale. Obviously he and his capital markets team didn’t do a particularly good job: Treasury told them it wouldn’t sell any of its stake at a loss, they tried to make sure that Treasury wouldn’t have to, and they failed, so Treasury withdrew its stake from the stock offer.

None of this is going to help relations between Citigroup and its largest single shareholder, the US government. Indeed, as Treasury tries to sell down its stake in the company over the next six to 12 months, it might not even use Citigroup’s equity capital markets team to do so, given the unimpressive showing that team made on Monday.

And I suspect that the real problem here was that Citi’s bankers started believing their own share price, thinking that there was much more fundamental demand for ownership of this behemoth than actually there is. Citigroup stock trades at a low nominal price on very high volume, which is like catnip to speculators who can make huge returns on relatively small changes in the share price. As a result, the nominal price is a relatively weak indication of the fundamental demand for Citigroup ownership. And debacles like yesterday’s result.


Having recently closed out a car loan with Citi I would like to comment on the very poor internal organization of this bank. I closed the loan and for 6 – 8 weeks continued to receive invoices, overdue notices and requests for payments that were not required. My comments met with responses from various departments that were always the same… it takes time for us to hear from other departments and make adjustments. I have never experienced such complete and total disorganization in a bank before. If Citi wants to become profitable, perhaps they should improve internal efficiencies and offer good customer service!

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Felix Salmon
Dec 17, 2009 05:24 UTC

ProPublica tries its hand at crowdsourcing a CDO story — ProPublica

Interesting, what the LA Times considers “outwardly unpretentious” — Radosh

“Buy two freedom trays and we’ll give you 2 FREE, and 4 Freedom Huggers!” — Freedom Tray

Good for the UK, phasing out paper checks entirely by 2018 — Yahoo

Gold. Women. Sheep. Will you be ready? — Colbert

Gary Weiss has more information on Judd Bagley, “a special kind of douchebag” — Weiss


vk — yes, I’ve asked; it should happen, I’m just not sure when, exactly.

Lawless Russia

Felix Salmon
Dec 16, 2009 22:58 UTC

Just in case you were feeling all happy about the book giveaway, let me bring you down to earth by pointing you to Law and Order in Russia, a website set up by Hermitage Capital Management in memory of their noble Russian lawyer, Sergei Magnitsky. Do read his story, it’s horrific, and I hope it shames the Russian government to do more than simply fire major general Anatoly Mikhalkin of the Moscow Interior Ministry (although that’s a good start).

It’s quite amazing, the way in which the Russian police — with full impunity — managed to steal a whopping $230 million which Hermitage had paid in taxes in 2006. Magnitsky seems to have been unexpected collateral damage. Do spread this story: it shows in the most visceral way just how lawless Russia really is.

(Many thanks to Jesse Eisinger for the heads-up.)


What happened to Sergey Magnitsky is an unimaginable tragedy. The rampant lawlessness in Russia is truly unconquerable if even lawyers are not safe from the reprisals of crooked politicians. Hopefully the steps by the Hermitage foundation to shed light on this sad situation will bring some awareness and possibly some change which is desperately needed.


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Holiday book giveaway

Felix Salmon
Dec 16, 2009 21:39 UTC

Many thanks to Abnormal Returns for inspiring me to give away the large pile of books that has slowly been accumulating on my desk over the past year. Some are galleys, some are duplicates, some I’ve started reading but know I’ll never finish; all of them will have much better homes elsewhere. So If you want one of these books, just send an email with your mailing address to salmonbooks@gmail.com and I’ll cross it off the list. Happy holidays!

John Lanchester: I.O.U.: Why Everyone Owes Everyone and No One Can Pay
Mia de Kuijper: Profit Power Economics: A New Competitive Strategy for Creating Sustainable Wealth
Janet Tavakoli: Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street
Keith Fitz-Gerald: Fiscal Hangover: How to Profit From The New Global Economy
Josh Kosman: The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis
Zachary Karabell: Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends on It
Jim Paul and Brendan Moynihan: What I Learned Losing a Million Dollars
Moshe Adler: Economics for the Rest of Us: Debunking the Science that Makes Life Dismal
Charles Geisst: Collateral Damaged: The Marketing of Consumer Debt to America
Raj Patel: The Value of Nothing: How to Reshape Market Society and Redefine Democracy
Lawrence McDonald: A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
Matthew Bishop and Michael Green: The Road from Ruin: How to Revive Capitalism and Put America Back on Top
Elisabeth Rhyne: Microfinance for Bankers and Investors: Understanding the Opportunities and Challenges of the Market at the Bottom of the Pyramid
Colleen DeBaise: The Wall Street Journal. Complete Small Business Guidebook
Daniel Pink: Drive: The Surprising Truth About What Motivates Us
Burton Malkiel and Charles Ellis: The Elements of Investing
John Bogle: Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition
Nicole Gelinas: After the Fall: Saving Capitalism from Wall Street and Washington
Edward Hess: Smart Growth: Building an Enduring Business by Managing the Risks of Growth
William Bowen, Matthew Chingos, and Michael McPherson: Crossing the Finish Line: Completing College at America’s Public Universities
Peter Leeson: The Invisible Hook: The Hidden Economics of Pirates
Robert Frank: The Economic Naturalist’s Field Guide: Common Sense Principles for Troubled Times
Kate Kelly: Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street
Anthony Saliba: Option Strategies for Directionless Markets: Trading with Butterflies, Iron Butterflies, and Condors, and Option Spread Strategies: Trading Up, Down, and Sideways Markets (let’s call this one a bundle)
Liaquat Ahamed: Lords of Finance: The Bankers Who Broke the World
Paul Polak: Out of Poverty: What Works When Traditional Approaches Fail
George Akerlof and Robert Shiller: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Ian Bremmer and Preston Keat: The Fat Tail: The Power of Political Knowledge for Strategic Investing
Adam Penenberg: Viral Loop: From Facebook to Twitter, How Today’s Smartest Businesses Grow Themselves
Charles Gasparino: The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System
David Wiedemer, Robert Wiedemer, and Cindy Spitzer: Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown
Matthew Bishop and Michael Green: Philanthrocapitalism: How the Rich Can Save the World
Michael Blastland and Andrew Dilnot: The Numbers Game: The Commonsense Guide to Understanding Numbers in the News, in Politics, and in Life
Jon Jeter: Flat Broke in the Free Market: How Globalization Fleeced Working People
Asif Dowla and Dipal Barua: The Poor Always Pay Back: The Grameen II Story

And I have one DVD, too: The Chicago Sessions: Law and Ethics of the Credit Crisis, with Martha Nussbaum. You can watch it on YouTube, but maybe you want the DVD instead?

Update: Man, you guys really go for Akerlof & Shiller and Liaquat Ahamed!

Update 2: And the options books seem popular too. Who knew?

Update 3: All gone. Thanks for your emails!


I heartily agree with giving books away. I year ago when I started law school I gave away about 130 books, I think. Otherwise they would have stayed on my bookshelf untouched until I died and then they would either have been destroyed or auctioned off to a real estate agent who would use them to decorate houses for sale.

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Guy Hands and Citi’s Chinese walls

Felix Salmon
Dec 16, 2009 18:43 UTC

Terra Firma has filed a slightly batshit lawsuit against Citigroup, in which the poor sheeplike Guy Hands claims he only bid for EMI because Citi’s David Wormsley told him he ought to.

There’s another part of the lawsuit, though, which hasn’t got quite as much attention: Hands claims that Citi put out a research report in September the publication of which had all manner of nefarious undertones:

While nominally labeled an analyst report regarding the publicly traded stock of Warner, the core of the Citi Report was a broadside attack on Terra Firma, its investment in EMI, and its reputation. Citi launched the attack in order to create marketplace uncertainty about EMI’s ability to operate as a going concern, thereby damaging EMI’s currentand prospective business relationships and profitability, and undermining Terra Firma’s ability tomanage EMI successfully.

In other words, Citi’s objective in publishing the Citi Report was to undermine EMI’s performance, causing the business to fail the quarterly covenant test and thereby allowCiti to wrest control of EMI from Terra Firma.

Wow, a research report can do all that?

Citi was kind enough to send me a copy of the report, although they refuse to let me post it here so that you can see for yourself what it does and doesn’t contain.

It’s true that the report talks a lot about “EMI’s banks” without ever disclosing that in fact there’s only one bank involved — Citi. One would think that given the authorship of the report, that would be a pretty obvious disclosure to make, but at the same time the identity of EMI’s banker was already known to anybody following the EMI saga.

But I see no “broadside attack on Terra Firma” in the report. Instead, it’s all based on the fact — and it is a fact — that Terra Firma is asking Citi to write down the principal amount owed, in return for Terra Firma injecting hundreds of millions of dollars of new money into EMI. Writes analyst Jason Bazinet:

The key question for the banks is do they accept Terra’s offer to lower debt, wait for the industry to turn- around, or do they push EMI into insolvency?

The point here is that any bank can be expected to act in its own best interest. Terra Firma is offering one option: a write-down of principal, along with an increased chance of repayment after new money is invested into the company. But any such option carries an implicit ultimatum: if you don’t write down your loan, Terra Firma is saying, then we won’t inject any more money, and EMI will be forced into bankruptcy.

Bazinet’s report basically just looks at what happens in that latter case. When a company declares bankruptcy, it essentially gets taken over by its creditors. In this case, the creditor is Citi, which — as the Terra Firma lawsuit explains at length — has long been advising both EMI and Warner Brothers with an eye to merging the two companies. But even putting to one side the existence of Citi’s M&A advisory practice, the obvious Plan A for any creditor faced with Terra Firma’s ultimatum is to seize the company and sell it to Warner. If the proceeds of such an action mean that the bank gets its original loan back in full, there’s no reason to go along with Terra Firma’s plan and write down the loan.

Bazinet’s analysis indeed comes to the conclusion that if EMI were to declare bankruptcy, “the banks will likely recoup their initial investment in the firm, increasing the possibility of an EMI insolvency”. If Citi’s lending arm were to come to the same conclusion, then the chances of them taking Terra Firma up on its offer would be slim indeed.

But it’s a very, very long way from that simple argument to this kind of conspiracy theory:

Artists who are considering signing contracts with EMI are less likely to do so as a result of the Citi Report, and more likely to sign instead with either Warner or one of the other major music labels…

The purpose behind Citi’s smear campaign is to force these artists and counterparties to refuse to do business with EMI, thereby undermining EMI’ s ability to generate revenue and, hence, to meet the financial covenants in the Financing Agreements.

Somehow I doubt that a band on the verge of being signed by EMI will (a) find the Citi report; (b) read and understand it; and (c) decide that the risk of EMI merging with Warner brothers means that they’d be better off not signing with EMI at all. The worst-case scenario would be that the band in question might ask for some kind of change-of-control clause, saying that if EMI merges with another label, the band has the right to renegotiate its contract. Call it a Poison PiL. (Any such agreement, of course, would only strengthen Terra Firma’s bargaining position with its bank.)

More generally, Hands is leveling an extremely serious accusation against Citi generally and Bazinet in particular — that Citi’s research arm is happy to do the bidding of its investment bankers, and that Chinese walls at the company are either low or nonexistent. Remember that we’re talking about the former employer of Jack Grubman here: Citi, more than most banks, knows the dangers of using research for ulterior motives.

My feeling is that Bazinet is simply collateral damage in the war between Citi and Terra Firma. Hands threw the accusation against Bazinet into the lawsuit not because he particularly thought it would stand up in court, but rather because he wanted to come out guns-blazing for strategic reasons. If Citi doesn’t accept his ultimatum now, it might still be able to sell EMI to Warner, but it will also have a major lawsuit to contend with, which will cost it significant amounts in management time, legal fees, and general public image. Hands doesn’t want to win this lawsuit: he wants to drop it, in return for an agreement by Citi to write down its loan. It’s a high-risk play, because the suit makes him look a bit stupid. But that’s obviously a price he’s willing to pay.

(Many thanks to Peter Kafka for setting me off on this trail.)


More generally, Hands is leveling an extremely serious accusation against Citi generally and Bazinet in particular — that Citi’s research arm is happy to do the bidding of its investment bankers, and that Chinese walls at the company are either low or nonexistent. Remember that we’re talking about the former employer of Jack Grubman here: Citi, more than most banks, knows the dangers of using research for ulterior motives.

I will not allow myself to believe that you are as naive as you are painting yourself. You are a freaking financial blogger at Reuters! Chinese walls??? Sure, leave a chair out for Eliahu, but do NOT tell people you actually believe he’s sitting there.

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Ben Bernanke, Person of the Year

Felix Salmon
Dec 16, 2009 15:12 UTC

Reading Michael Grunwald’s homage to Ben Bernanke, the 2009 Person of the Year, what’s striking is the list of defenders and opponents. At the top of the piece, Grunwald talks about how he has been assailed by “criticism from all directions”, but doesn’t really name names, relying instead on generalities such as “bleeding-heart liberals and tea-party reactionaries alike”. The list of named detrators is: Ron Paul, on the right, and Paul Krugman, on the left.

Meanwhile, the people lining up to praise Bernanke include Stanley Fischer; Mervyn King; monetary historian Liaquat Ahamed (who wrote the book Bernanke “wishes he had written himself”); Alan Greenspan; Frederic Mishkin; Jean-Claude Trichet; Kevin Warsh; Tim Geithner; and Hank Paulson. It’s heavy on Davos-circuit central bankers — the kind of men who instinctively circle their own wagons in times of crisis and will always say nice things about each other if asked. Besides, substantially all of them, bar Ahamed, would implicitly be criticizing themselves if they said anything bad about Bernanke’s decisions: they all signed on to what he did.

Grunwald himself has clearly decided that Bernanke is a hero, dismissing serious criticism of say the decision to let Lehman fail by simply saying that “it’s not clear how the Fed could have saved Lehman without a buyer”. (Of course there was a buyer — Barclays — and it’s precisely by stepping in with some short-term Bear-style financing that the Fed and Treasury could have allowed a smooth acquisition to proceed.)

Most interestingly, Grunwald never mentions the Fed’s massive loss of independence over the course of the crisis. While it’s understandable as a policy response — the last thing you want in a crisis is the fiscal and monetary authorities pulling in different directions — it also carries much greater risks than some of the other things that Grunwald worries about. On the other hand, Grunwald I think understands the black-swan world that Bernanke’s facing:

He’s got to worry about currency traders too; the Chinese and other holders of U.S. debt could lose confidence and start a run on the dollar that could shake up the world, or a Dubai-style default hysteria could start a run to the dollar that could cripple U.S. exports.

It’s not that either of these things are likely, of course, but the point is that markets are volatile, and that the dollar is liable to move sharply in an unknown direction with very little warning. The same is true of stocks and credit: if they can rise as far as they have done over the past 9 months, they can fall fast too.

So Bernanke needs to remain on a war footing, willing to react as necessary to chaos if it re-emerges, and staying in very close contact with Treasury. That will only solidify the degree to which he’s defended by the international technocracy, but it also makes it much harder for him to break the ropes tying him to the White House when he needs to start making politically-unpopular decisions.


These men should be arrested and tried for treason, their personal assets and the assets of their banks should be transferred back to the state where they belong.

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Felix Salmon
Dec 16, 2009 05:47 UTC

Tyler Cowen on whether we should read great thinkers or their distillers. I agree, but: Kripke on Wittgenstein — MR

Wamu asks to probe Fed over collapse — Reuters

Wherein the WSJ describes interest-rate expectations as “an epic fail” — WSJ

“The Intersection of Christianity and Journalism” would seem to be the null set, judging by the number of posts here — Case in Point

Beware of AAA Road Service Scams — Weiss

Sicha guts Schudson — The Awl

It’s AT&T that’s the problem. Not the iPhone — Daring Fireball

Lehmann on Taibbi: Good stuff — The Awl


To be fair to Kripke, he did explicitly state that WRPL was not supposed to be taken as an exposition of Wittgenstein.

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The rise of India’s moneylenders

Felix Salmon
Dec 16, 2009 05:24 UTC

Ketaki Gokhale has a fascinating article on the way in which traditional high-interest moneylending has grown in India alongside microfinance, rather than being marginalized by it:

Even as the government and nonprofit organizations came together to create the Indian microfinance market in the 1990s, traditional moneylenders’ share of total rural Indian household debt grew to 29.6% from 17.5%, according to a government survey. Another recent survey by the Reserve Bank of India found that between 1995 and 2006, the number of registered traditional moneylenders increased 56% to 19,627 from 12,601. Though much harder to quantify, unlicensed lenders are believed to have made similar gains, the survey says.

Correlation is not causation, of course, and the microlenders are predictably painting the rise in moneylending as simply proving that there’s a lot of untapped demand for credit. But Gokhale has a colorable case that in fact the microlenders are parasitical on the existence of moneylenders, who allow microfinance borrowers to make payments they’d otherwise not be able to come up with. Or rather, that seems to be the belief of some group of anonymous people:

Some academic researchers believe the moneylenders are keeping afloat many microfinance groups…

Microloans have a stellar repayment rate — close to 100% — and some analysts believe a hidden reason is the stopgap provided by moneylenders.

I’d love to know who these researchers and analysts are, and I’m puzzled by the fact that none of them are named in the article. Maybe in Gokhale’s next article we could have some hyperlinks.

Why decline $80,000 for doing nothing?

Felix Salmon
Dec 16, 2009 04:41 UTC

This Elizabeth Wurtzel piece has been gnawing at me all day:

The class of associates that just joined Cravath was asked to defer their arrival for a year in exchange for a sweet deal: They would receive $80,000 to not work, plus they would get benefits and student-loan payments. This offer was optional…

I’ve been told that none of the graduates of Yale Law School who were headed for Cravath accepted their offer of $80,000 to surf and sunbathe, or go forth and save the world. Since no one at either institution is willing to discuss this—and I don’t blame them, because I would be embarrassed too—I don’t know this for certain. But here’s what I’m sure of: Not everybody took Cravath up on this peachy keen opportunity to do anything for a year with pay and benefits. And that by itself is disturbing enough.

What on earth would possess a law student fresh out of Yale Law to decline this offer?

Is it that these students simply can’t think of anything worthwhile to do with one year, $80,000, and the world as their oyster? I know that lawyers can sometimes suffer a failure of imagination, but that’s crazy.

Is it that they feel they can’t afford to live on a mere $80k? Unlikely: they’re fresh out of university, after all, and Cravath is paying their student-loan payments.

Is it that they desperately aspire to the drudgery and 100-hour weeks of a first-year biglaw associate? Surely not.

Is it that they fear their job won’t be waiting for them on their return? If they mistrust Cravath that much, they shouldn’t take the job in the first place.

The only conceivable reason I can think of to decline the offer is if you have school-age kids to support, and that seems improbable for all but a tiny minority of first-year biglaw associates.

I suspect that there’s something very American going on here — something to do with taking pride in hard work — but as an Englishman, I have to say it eludes me. Can somebody fill me in?

Update: There are some great responses in the comments, especially from Future_Lawyer.


…the Prisoner’s dilemma

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