Trading Citigroup

By Felix Salmon
March 30, 2010
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:

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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.

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