Losers double down.

That’s the classic trading rule which the USA is about to violate in an enormous way. According to trading maven Dennis Gartman, one should “never, ever, ever, under any circumstance, add to a losing position.”

And yet that is what we are about to do.

To review: Former Treasury Secretary Hank Paulson made a terrible investment on behalf of the taxpayers by purchasing a 7.8% stake in Citigroup (C) for an initial $25 billion dollars. He further put the US on the hook by guaranteeing against 90% of future losses on $301 billion in assets. Subsequently, we (the taxpayers) injected another $20 billion dollars.

At the time, Citigroup had a market cap of about ~$50 billion dollars. Today, its worth ~$13 billion.

So for about 100% of the market value of Citi, plus insurance guarantees worth of as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment.

Pretty good deal, eh?

That $45 billion dollar stake now has a market value of just over a billion.

And, its about to get even worse.

Rather than do what is the FDIC-mandated-by-law thing, we will instead convert the nearly worthless common into preferred shares. The taxpayers stake will rise to near 40% of Citigroup.

NYT:

“Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock. It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.”

What does this do for us? Well, the higher investment stake creates an enormous incentive for John Q. Public to continue to pour money into Citi, regardless of valuation. The inept banking giant then has access to infinite amount of capital, courtesy of you, the 1040 filers.

Its just another example of why these insolvent banks should be nationalized, or for you squeemish free marketers, FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

If Obama continues to listen to the god-awful advice of Larry Summers and Tim Geithner, he will doom his presidency, and finsh marginally ahead of George W. Bush on the list of worst presidents.

This is not change we an believe in . . .

>

UPDATE: February 27, 209 7:41am

Its a done deal

Treasury Announces Participation in Citigroup’s Exchange Offering

http://www.ustreas.gov/press/releases/tg41.htm

>

Previously:
The New N Word: Nationalization (February 25th, 2009)

http://www.ritholtz.com/blog/2009/02/nationalization-the-new-n-word/

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING (December 3rd, 2006)

http://www.ritholtz.com/blog/2006/12/dennis-gartmans-not-so-simple-rules-of-trading/

Sources:
U.S. Is Said to Agree to Raise Stake in Citigroup
ERIC DASH
NYT February 27, 2009

http://www.nytimes.com/2009/02/27/business/27deal.html

Citigroup to Be Asked by U.S. to Get Private Capital
Bradley Keoun and Rebecca Christie
Bloomberg, Feb. 27 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHfixhywTZBQ&

Category: Bailouts, Markets, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

51 Responses to “Citigroup: World’s Worst Investment to Get Even Worse”

  1. Scott F says:

    These policies are incrementally better than W’s but its way too late for subtle changes

    Why are these guys so terrified of Nationalization?

  2. call me ahab says:

    At this point I am getting pretty pissed off. Initially , I gave the government the benefit of doubt because they were charting new territory and were trying new things to stop a banking collapse- but this- now- at this juncture- we already know that this is a failed plan. I don’t know how any top manger at Citi can walk around in broad daylight and not feel like a complete and utter failure- they should be the honest ones and tell the government it is a lost cause.

  3. leftback says:

    I have commented many times here on the irony of the US repeating the Japanese experience after being so critical of the BoJ during the 1990s. This is nothing new.

    One wonders whether maybe there is some derivative event that is triggered if C < $1.00? Maybe GS and BRK placed some monster bets through AIG and the whole thing would blow sky high.

    In any case, I have ceased caring about the zombie institutions formerly referred to as “banks” and the collection of paper certificates often known as “the market”. I know that people will drive cars, cook, eat and heat their homes. I also know that the value of the US$ will decline. So I am invested accordingly.

  4. cix says:

    I think you are misreading the news. This IS a Nationalisation. US Gov got almost 40% with no new cash infusions, they still have additional Prefs to convert as needed (and we all know it will be needed) to get to almost 75%.

    It is quite probable that the Company after the stress test will need additional capital, as no private investors will be available I would imagine the FEDs will own almost 100% of the Company.

    It IS a nationalisation, at this point is not relevant the timing of it if in the future the FEDs will own almost 100%. They do this way not to be called communist.

  5. “we will instead convert the nearly worthless common into preferred shares.”

    minor edit needed..

    past that, beyond its eminent expectability, noting, only, this transgression is a poor use of pixels..
    http://www.thefreedictionary.com/eminent

    this, though: “If Obama continues to listen to the god-awful advice of Larry Summers and Tim Geithner, he will doom his presidency, and finsh marginally ahead of George W. Bush on the list of worst presidents.

    This is not change we an believe in . . .”

    is, to me, the redeeming insight.

    let it be said, at least once, that the O-one was hired to finish off the job. And, if we remain in our current, Apathetic, State, that’s exactly what will occur.

  6. try2bamused says:

    I never in my wildest dreams thought that this would happen. I thought for sure that saner heads would prevail. Why don’t they just man-up and admit that there isn’t a damn thing they can do to stop this mess? That all of their clever policy moves and massive taxpayer bailouts are a complete waste. This problem is global in scope and can only be resolved by price and time. Pride cometh before a fall. See you at SPX 150.

  7. JustinTheSkeptic says:

    leftback said: “I know that people will drive cars, cook, eat and heat their homes. I also know that the value of the US$ will decline.”

    Not quite Descarte’s, “I am, because I think I am, therefore I’m.” because driving, cooking, eating, and heating come in to being from our actions, and I/we are….well, just HERE. We might not have to get into bunkers like Joe Kernin, laughingly talked about this morning on CNBC, but why people think that we are out of the woods as far as another Great Contraction in our economy is concerned, I can’t figure out. Wasn’t that great economic news yesterday, seeing manufaturing taking a gigantic dump. We are living in a world where no one is held accountable, which means the can gets kicked further and further down the road, and nothing, (zilch!) gets accomplished. Remember it took three years to sink into the trough back in 1929, our economy, including the world economies are much larger today, so it might take five or six years this time around. Make no mistake, we are heading there.

  8. jacobsk says:

    If the government does not nationalize Citi now, the market will do it for them and they will eventually capitulate

  9. ChickenDinner says:

    Bernanke is like a gambler that is doubling down, hoping to get back to even. Nice to know that the Fed has become the worlds largest casino and a disaster of an experiment that is doomed to failure.

  10. PrahaPartizan says:

    CitiGroup should have been placed in receivership. This would have been nothing unusual. This happens regularly in industry and business.

    It does not mean that the government runs the business. It doesn’t. It does mean that a board-selected, government-approved management assumes control of the business to make a turn-around It does not mean “nationalization,” which is meme-loaded word intended to prevent the Treasury from receiving value for its investment in this circumstance.

    Geithner is trying to square a paradox. He wants to enable the current shareholders to recovers some value. He needs to clear the junk off Citi’s books. He must decide whether his recent oath of office takes precedence over his prior relationships with the Citi management. If he decides that he can’t give the people’s business priority, I would ask him to resign. He is clearly not essential to resolving this issue.

  11. jacobsk says:

    If Summers is “Dick Cheney” and Geithner is “Rumsfeld”, who is “Colin Powell” ?

  12. Let me ask you this: If I owe $1,000 on five credit cards, am I better off if I transfer everything to one card on which I’ll owe $5,000?  On the one hand, I still owe $5,000 but on the other, I don’t have five cards worth of debt.  The answer, of course, is that it doesn’t really matter (absent differences in interest rates).  So when I read about preferred shareholders converting their shares into common stock in order to boost the tangible common equity ratio without receiving any additional capital infusions, I wonder what all the fuss is about.  Sure, C will no longer have to pay the preferred dividend (although it now looks like they are suspending all dividends but I have to read more before I’m positive) but with no additional capital, is the company really better off?  Not just better from an accounting standpoint, but really better off?  The answer, of course, is no.  I am positive future capital injections will be forthcoming as there is simply no way this company does not need, and will not need, more money.  How anyone in the world feels injecting billions upon billions of dollars into a company that is not worth even close to the money we have provided and is decreasing in value with each passing day in exchange for 40% of the company, is a good use of taxpayer money is beyond me.  Introduce me to those people.  I’ve always wanted to meet a maniac.
     
    Building on that theme, Citigroup is blatantly a zombie bank in the truest sense of the word and its drag on our economy has already begun.  It is clear that we have not learned any of the lessons Japan learned during the ‘90s and while I am sympathetic to the political argument against nationalization, the reality based argument against it is flimsy.  There would be a whole host of issues to follow should C be taken over and I am in no way confident in the government’s ability to quickly spin this company out in smaller, more functional parts with much better debt profiles.  But one must ask what we are getting for our money?  One must ask whether propping up a company through accounting slight of hand accomplishes anything for our country in the long term.  I understand the difficulties we face and I understand the intense and complex issues that come with haircutting the bondholders but with a blueprint in Japan, I just find myself thoroughly confused as to why we would not want this over with as fast as possible.
     
    And lastly, as I noted earlier in the week, it looks like the auto suppliers are getting a bailout as well.  Will someone please tell me when this ends?

  13. leftback says:

    Foolproof method to recapitalize C:

    1. Find Sandy Weill and Chuck Prince.
    2. Invert.
    3. Shake.
    4. Collect.

  14. kmikev says:

    Does Gartman’s trading rule imply that dollar cost averaging is a bad strategy? I’ve often wondered about this.

  15. doug says:

    I am officially capitulating on the O-man….I now think he sucks

  16. Hulkster says:

    As a ex-pat living in Canada, I used to get kidded about how ‘socialism’ was up here. At least here the banks are profitable at not gov’t owned! Royal Bank.. a billion quarterly profit yesterday and still an 8% dividend yield and sub-8 p\e. Decent companies getting pounded by sectoral shockwaves from the duds like C.

  17. NovBear says:

    kmikev,

    Wonder no longer, dollar cost averaging is a BAD STRATEGY! Do not listen to those clowns who manage your 401k plan.

    Mr. Ritholtz, while I am also disturbed by this Citi development, I must say that I’m disappointed to see the ” This is not change we an believe in . . .” cliche on your blog.

  18. Mike in Nola says:

    Unintentional joke of the day by British bankers:

    Half of Bankers Would Quit UK If Bonuses Capped
    http://www.cnbc.com/id/29423109

    I’m sure there will be much amused comment.

    Shows that this class without a useful skill still doesn’t get it. Only thing that would scare us more would be if they threatened mass suicide if we didn’t keep up the pay and perks.

  19. Greg0658 says:

    when CNBC says _____ is going bullish .. isn’t that bearish for _____ ?
    who are they rooting for?

    I think it is a fine gray line between the ‘isms when you are here ..
    that line flips via the side you are on

    I like that line “wheres my bailout”
    I mean “wheres my neighborhood recapitalization till we’re solvent again”
    but thats the essence of the game isn’t it

  20. quiddity says:

    Can we have Vikram Pandit’s head on a pike now?

  21. kmikev says:

    Thanks NovBear. That’s what I figured. Seems to me you could dollar cost average yourself straight into insolvency in this market.

  22. wnsrfr says:

    I worked for a small UK software company that for the last 10 years has been recapitalized repeatedly by the same major stockholder, basically a wealthy Brit that won’t see his investment go to zero so he keeps doubling down…by doing so his investment doesn’t go to zero but it is questionable that he will ever see a profit and is probably just delaying the arrival of zero day.

    So is that what this is? The “Wealthy Patron Syndrome?”

  23. franklin411 says:

    Ya know, Barry…I like you, but frankly your crying and whining and boo hoo hoo is music to my ears.

    I *WANT* Wall Street folks like you and your friends to bleed from your eyes and ears. I *WANT* Wall Street traitors who post on these blogs to do the same.

    When the overwhelming sentiment on Wall Street is that things aren’t going THEIR way, then I know without a doubt that thing are going OUR way–the American people.

    Rick Santelli said it backwards when he pointed to this Chicago traitor friends and said “This is America.” No, Mr. Santelli. There’s a handful of you and hundreds of millions of us. We are America. You are a traitor.

  24. “Will someone please tell me when this ends?”

    When those little scraps of linen paper become as worthless as the banks that used to sell them. All we’re doing is transforming private insolvencies into public ones.

  25. kmikev says:

    franklin…

    I’m afraid what is good for the ‘traitor’ is good for the American people.

  26. ottovbvs says:

    “Can we have Vikram Pandit’s head on a pike now?”

    ……Vikram stays which is a wise decision but they are going to shake up the board.

    “Why are these guys so terrified of Nationalization?”

    ……Because there is a ton of economic/psychological/technical downsides to the full nationalization as defined by BR and the nationalization claque which they never address.

    ……BR and all the other fans of nationalization better get used to the idea that they are not going to do it except as a last resort. They’ve basically put a ring fence around Citi, BAC, and most of the other leading institutions and these guys can keep on functioning quite happily even if their stock price goes to 10cents driven by people who are taking advantage of all this nationalization furore to short the banks. I actually think this speculation is one of the principle reasons they are taking this view, if they nationalize the top six the shorting contagion will spread to the next six, and so on until they could end up owning 75% of the banking system. It’s probably not going to happen because basically this government is not taking its marching orders on the banks from stock traders any more than they are taking their orders on foreclosures from ranting former derivative traders who now have gigs on cable TV.

  27. ottovbvs says:

    kmikev Says:

    February 27th, 2009 at 9:51 am
    franklin…

    I’m afraid what is good for the ‘traitor’ is good for the American people.

    …….The evidence of the last eight years would suggest otherwise.

  28. rktbrkr says:

    Bringing these CITI bailout numbers together actually makes me feel sick. Once the gov commits funds to a failing company they can’t stop because they’d be admitting a mistake, even the change in admin can’t force this fundamental admission.

    CITI,AIG,BAC,GM will cost us trillions, we’ll be paying for eternity.

  29. FrancoisT says:

    Barry,
    What is the proportion of secured debt on Citi et al. that is hold by the same people who buy our IOUs and dollars by the billions every week, a.k.a China and colleagues?

    If the answer is “mucho” then the Fed and Treasury actions make more sense.
    But I still hate the whole situation.

  30. ottovbvs says:

    “Unintentional joke of the day by British bankers:

    Half of Bankers Would Quit UK If Bonuses Capped”

    ……..Actually I heard a better one on cable tv last night by some Republican “strategist” with the usual Mussolini haircut referring to some Republican base conference going on in Washington at the moment. He said “The nuts and bolts at this meeting”

  31. Myr says:

    At some point, Jane and Joe Taxpayer will realize that Team Obama has been handing over our money to the bankers/bank_creditors and it’s just GONE. I can’t imagine that this will go over well. I’ve been pulling my hair out as I wonder how it is that they can get away with this theft.

  32. ottovbvs says:

    “I’ve been pulling my hair out as I wonder how it is that they can get away with this theft.”

    …Then you’ll have you’ll have the fashionable Mussolini haircut. Don’t be so melodramatic. Team Obama is basically doing what Team Bush to their credit were doing for the last nine months.

  33. Dow says:

    This is about a handful of investors and nothing more. They can call it anything they want but the government is now protecting those foreign investors over the US taxpayer.

  34. “the government is now protecting those foreign investors over the US taxpayer.”–Dow

    just ‘now’, not since 1913?

    “The inept banking giant then has access to infinite amount of capital, courtesy of you, the 1040 filers.”–BR

    while, no doubt, 1040 filers are fueling part of the flame, anyone involved in U$D denominated trade is bearing the brunt..

  35. Dow says:

    Since you seem to think it’s so obvious Mark, then why is no one pointing it out?

  36. bman says:

    Geithner looks like a schizophrenic dude in a suit. Why should we expect anything rational out of his office?

  37. deanscamaro says:

    As I said on another post:

    “Everything I read these days leads me to believe that the U.S. has lost sight of the fact that the bank stress tests, bailout packages, salvaging of bad financial institution, atrocious budgets, etc. are developed by our elected politicians and their appointees. What else should we expect from this group of brain-dead people? These are mentally challenged individuals and they are shooting in the dark.”

    Need I say more??????

  38. Dow, numerous people Have pointed it out, I’m sure, whatever “it” is..

  39. jash says:

    Oil…is a problem!
    Dow, Mark is right…The Saudi’s have a nice stake in Citi!
    We’re playing nice with our lenders at the expense of our future!

    Civil Wars are brutal! That’s the alternative!
    They don’t have to be violent…but if we really want to send a message
    then this seems like the logical solution.

    Perhaps we should take it all down! And rebuild it…

    But I ask a brutal an honest question for all of you on this chat board!
    Do you have the guts to see these institutions fail? Because they have
    set themselves up to take casualties…many many casualties…This includes
    ourselves…(well at least myself and a very close relative…)

    Sorry for the venting…the only place I could do it!

    P.S. At this point they can only protect the Green Back…
    Heaven help us if that slides!

  40. Myr says:

    @ottovbvs

    “Don’t be so melodramatic.Team Obama is basically doing what Team Bush to their credit were doing for the last nine months.”

    I never said Obama was doing anything differently than Bush. Between the two of them we’ll have seen at least $1.5 trillion in TARP/CAP money and over $500b in guarantees fly out the door while bondholders haven’t paid a dime. You may disagree as to whether or not that’s a wise move, but please cut the wiseass comments to those who think that the taxpayers are getting screwed.

  41. Lugnut says:

    ” I think you are misreading the news. This IS a Nationalisation.”

    If it were the governement would be running the bank. This is just an exchange of capital for a nearly worthless equity stake. Same guys are still running the show and calling the shots. Thats not nationalization from where I sit.

  42. formershrink says:

    “This is just an exchange of capital for a nearly worthless equity stake.”

    It would be very helpful if someone could explain, for the layman, what is the true cost to the public of this conversion. I’m guessing that, even though the government is not putting in any $$, the taxpayer is losing something. What?

  43. rcm says:

    For mean-reverting assets, adding to losing positions is rational. I would wager a large amount of money that Jim Simons’ Medallion Fund occasionally adds to mean-reverting assets/spreads that move adversely (or another way to look at is that one scales into them rather than getting max long or short in one fell swoop). Of course, twenty years ago the world was much less mean-reverting and more momentum-driven, in which case, it was rational NOT to add to losing positions. But the behavior of many assets has since changed. Adapt or die.

  44. Brett Tibbitts says:

    If Obama continues to listen to the god-awful advice of Larry Summers and Tim Geithner, he will doom his presidency, and finsh marginally ahead of George W. Bush on the list of worst presidents.

    This is not change we an believe in . . .

    >

    It’s too early to make such a prediction Barry. Perhaps the US will find out that YES WE CAN DO WORSE THAN GEORGE BUSH

  45. GRV305 says:

    C is down 38% today,
    so if we had X there yesterday, now we have .62 X

    I don’t know what X was, but it would already have been a lot less than the money put in.
    If it were my money, I’d be really unhappy. Oh, wait

  46. CyHastings says:

    “Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin to slit throats.”

    ~ H. L. Mencken

    I’m beginning to think Mencken was an optimist.

  47. Jojo99 says:

    Losers double down.

    That’s the classic trading rule which the USA is about to violate in an enormous way. According to trading maven Dennis Gartman, one should “never, ever, ever, under any circumstance, add to a losing position.”

    =====================
    But, but, but…

    Isn’t this what nearly every broker recommends on CNBC with “dollar cost averaging”? [lol]

  48. gloppie says:

    This was commented:
    “It IS a nationalisation, at this point is not relevant the timing of it if in the future the FEDs will own almost 100%. They do this way not to be called communist.”

    But…isn’t the FED a consortium of PRIVATE banks ?
    It is not communism, it is grand larceny.

  49. d4winds says:

    2000 years ago the Treasury’s new CAP program was described in great detail:
    “Ask & ye shall receive.”

  50. jmay says:

    I’m not an economist, but amidst all the whining and righteous indignation, perhaps someone could answer a few questions for me:

    1) Isn’t the current global banking structure currently very much skewed in America’s favor?

    2) If America’s banking conglomerates are allowed to fail, what percentage of future financial earnings will be lost to foreign banks around the world that swoop in to take their business?

    3) What percentage of U.S. GDP will be lost in the process?

    Look — Hank Paulson was a Republican, but he was not an ideologue. And for all the right wing blather about Obama, and how powerful it makes people feel to say they’ve already given up on him, Obama is a moderate. What Paulson and Obama share is a global awareness — Paulson visited China many, many times and Obama spent years in Indonesia. They understand how quickly the world is changing, and they understand the enormous value of America’s continued position as front-runner. Despite the breath-taking number of screw-ups, we are still the only ones who can take ourselves out of the game.

    Even if we don’t recoup a dollar from the government investments in Citi and the like, there is still a quantifiable value to keeping these institutions operational, and there will almost certainly be unforeseen consequences to letting them fail.

  51. Amateur says:

    I would not wish to defend Citi’s shareholders, who deserve to be diluted to zero much faster.
    But,
    1. Nationalization does not mean that losses for the public will be smaller. Or bigger. It just means a change in ownership of banks and the procedure to appoint management.
    2. Cancellation of current shares through special legislation would entail more trouble and litigation than just diluting them under existing laws.
    3. Only defaulting on some of Citi’s obligations might pass some of the cost to the holders of the defaulted credits. I do not advocate this default, but it must be on the table for the sake of any honest argument about nationalization
    4. The debate would be more useful if the matter of ownership of the banks is held separately from the debate about which obligations will be maintained, and which, if any restructured.
    5. The primary role of the government is the role of regulator. The fact that this role was performed poorly, does not mean that it has to be abandoned, or replaced by the role of shareholder.
    6. There is nothing a shareholder can do that a regulator cannot do better. Holding both roles, on the other hand, creates a conflict of interest situation that will damage the quality of regulation.