Felix Salmon

Trading Citigroup

By Felix Salmon
March 30, 2010


With trading in Citi accounting for 25% of the volume on the NYSE, there’s only one game in town for stock traders — even if the price of the stock ended the day within 13 cents of where it started it. Zero Hedge puts it pungently, noting that trade is being increasingly concentrated in Citi, BofA, and the QQQQ Nasdaq index fund:

The entire market will soon consists of exactly two companies (both of which are wards of the state) and one ETF, as liquidity finds the path of least resistance.

This is not good for the market, and it’s long past time, I think, for that reverse stock split at Citigroup. It’s beyond silly for any company to have 28.5 billion shares outstanding; a one-for-10 split would overnight bring Citi volume down to sensible levels, bring the price into line with other Dow components*, and prevent some of the crazy speculation going on in Citi stock, where a swing of a few cents per share can mean massive P&L for the day-traders.

The idea is hardly original: Citi first proposed the reverse split back in March 2009, when there were a mere 5.5 billion shares outstanding, but it took until the fall for the idea to get shareholder approval, and the bank is still dragging its feet as the June 30 deadline gets ever nearer. Can somebody explain to me why this is taking so long? It really is getting in the way of efficient equity capital markets elsewhere.

I can’t believe that the delay here is due to pressure from Citi’s largest shareholder, which has just tapped Morgan Stanley to sell its 7.7 billion shares in an orderly fashion over the course of 2010. It’s about time that Treasury got out of this trade: now that its stake is in the black, it’s essentially just speculating if it holds on to those shares for longer than it has to.

And yes, as I said on BNN today, the fact that Treasury’s equity stake in Citi is now worth a good $7 billion more than was paid for it is indeed vindication of the don’t-nationalize strategy. It was still a bailout of Citi’s bondholders, of course, with all the moral hazard that implies. But, thanks to the broad-based equity rally, it’s worked out well so far.

That said, Citi is still too big to fail, and therefore still has an implicit government guarantee on top of all the explicit guarantees which are still floating around. The government might make a nominal profit on the sale of its stock, but that means effectively ignoring the enormous value of those guarantees to Citi, which is still the shakiest bank in America from a systemic-risk perspective. And every little thing helps: psychologically, a share price of $40 would surely make it seem a bit more solid than a share price of $4. Hell, it worked for AIG.

Update: As commenter lahar points out below, Citi is no longer a Dow component. I’d forgotten that. Sorry.

5 comments so far | RSS Comments RSS

felix, i feel like i’d be remiss if i didn’t remind all the “see, the government made money on the Citi bailout/trade” trumpeters that perhaps if the Fed hadn’t overpaid for a TRILLION dollars worth of mortgage backed paper of dubious quality, then the banks they bailed out might not have performed so “well”

Posted by KidDynamite | Report as abusive

“It’s about time that Treasury got out of this trade: now that its stake is in the black, it’s essentially just speculating if it holds on to those shares for longer than it has to”

is there any rationality to this at all? I had heard the saying “an investment is just a speculation that went wrong”, but it’s a joke, not a sensible principle of money management and not something that can be reversed to give an exit target. If the Treasury is speculating now, it was speculating when it was in the red.

Posted by dsquared | Report as abusive

Felix,I have to disagree with the comment that “it’s worked out well so far”. The government will “make” money on this transaction but who will lose? Essentially, they bought in low, tailored “stress tests” to make the bank look better (much like the Lehman stress tests which were jiggered three times until they came out positive), promoted the lack of transparency in off balance sheet assets and mark to myth, extended multiple implicit and explicit guarantees, backstopped home prices through MBS purchases and now will offload the shares onto the public. The government knows that to make money in a ponzi you need to get out early and they are simply setting up the next sucker.

Posted by BadBisco | Report as abusive

Why does it matter for the market overall if there’s a lot of trading concentrated on Citi? Traders will eventually move on. And why “bring Citi volume down to sensible levels, bring the price into line with other Dow components”? Citi’s not a DJIA component anymore, price doesn’t need to be in line with other DJIA components.

Posted by lahar | Report as abusive

Trading Citi is certainly not for the faint of heart.

On any given day, the Federal Government might

a) ban shorting on banks

b) buy up another 30 billion of crap off the Citi balance sheet.

c) buy another stake in Citi

d) sell their stake in Citi

e) force a common/preferred deal , complicating things

f) Announce something they intend to do, but never do

g) Announce something they intend to do, and really do

h) anything else I can’t think of.

At any rate, Citi shares ARE equity shares in something – but I am not sure what…

Posted by SCHARFY | Report as abusive

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