Chris Lau - Seeking Alpha

Friday, February 27, 2009

Citigroup Effectively Nationalized...but Not...Really...Yet

Reviewing the time line of events for Citibank over the last few months would illustrate that the government ownership (nationaliazation) of Citibank is not surprising:
  • Citibank sold its prized posession, Smith Barney brokerage, to Morgan Stanley, much to the surprise of the market
  • Received $25 billion of bailout funds in October
  • Received $20 billion of bailout funds in November
  • Today, the conversion of preferred shares to common will cut existing shareholders’ stake in the company by 74 percent
Quotes of the day from Bloomberg.Com:

On Rules (What Rules?):
“It’s just unbelievable,” said David Rovelli, managing director of U.S. equity trading at Canaccord Adams Inc. in New York, in a Bloomberg Television interview. “The government is making up the rules as they go. A continued breakup is probably in the cards.”
On Nationalization:
“This is another step toward creeping nationalization,” Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said in an interview on Bloomberg Radio. “This country is going through no less than an economic revolution,” said Levitt, a board member of Bloomberg LP, the parent company of Bloomberg News.

Comments on Preferred Shares
Investors ought to be wary of preferred shares. In Canada, Royal Bank, TD, CIBC, and Manulife all issued preferred shares paying a dividend of at least 6.5%. The appetite was overwhelming. Investors gobbled these issues like candy.

Followers of 'Intelligent Investing' (over 140 members strong) would shun the purchase of preferred shares.

Preferred shares are neither here nor there. Bond holders are the first in line to get their money back, should the company declare bankrupcy. Common shareholders benefit from capital appreciation. In fact, common shareholders will have a higher dividend payout than the preferreds, in some cases (see CIBC).

Beware. Do your homework for the Canadian banks: Analyze the cash flow, capital tier ratios, and do not ignore the outlook for both the global and specifically the Canadian economy. These factors will certainly impact your investment in what is perceived to be issues promising a high yield return.

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