Citigroup under pressure

By Felix Salmon
May 26, 2010
Morgan Stanley did its job: it managed to sell 1.5 billion of the government's shares in Citigroup for a total of $6.2 billion, or just over $4.13 a share. That's a good price, compared both to today's close of $3.86 a share and to Treasury's cost basis of $3.25 per share. Still, there's another 6.2 billion shares outstanding, which is quite a big overhang, especially now that Citi has admitted stealing from cemeteries, and looks like it's doing some pretty egregious book-cooking at quarter-end:

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Morgan Stanley did its job: it managed to sell 1.5 billion of the government’s shares in Citigroup for a total of $6.2 billion, or just over $4.13 a share. That’s a good price, compared both to today’s close of $3.86 a share and to Treasury’s cost basis of $3.25 per share. Still, there’s another 6.2 billion shares outstanding, which is quite a big overhang, especially now that Citi has admitted stealing from cemeteries, and looks like it’s doing some pretty egregious book-cooking at quarter-end:

citiborrow.tiff

Citi refused to comment on these numbers, but they’re big, and they look very bad. And a source involved in selling down Treasury’s stake in the bank seems to have come down with a severe case of bearishness, wondering if Treasury shouldn’t simply offload a massive stake to Qatar at a discount to the market price:

“If we dribble the shares into the market on a secondary basis, that may be the safest [strategy]. But it may not be the most economic. There are a lot of structural headwinds.”

Needless to say, buying bank stocks at the same time as big sovereign wealth funds has not proved to be a winning strategy in recent years.

Citi was trading at $5 a share last month, which means that it’s already seen 22% of its market cap obliterated in the past few weeks. It’s a low-priced and volatile stock which still, inexplicably, hasn’t gone ahead with the reverse stock split that everybody’s been waiting for, and until that happens it’s going to remain a stock for traders rather than investors. If I was at Treasury, I’d be nervous right now: it’s politically very hard for Treasury to sell its stake at any price below $3.25 a share, and the market, as any trader knows, tends to be drawn magnetically to exactly the state of affairs that you least want.

So well done to Morgan Stanley for getting that big initial tranche out the door. Selling the rest of the stake is going to be hard, and it’s going to be nigh-on impossible if Treasury now expects to be able to get $4.13 a share or higher.

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