February 28, 2009
Stock Costs Less Than Their ATM Fee
Iron rice bowl.
FEB 27: Last week, we warned that Citigroup and Bank of America would most likely be taken over by the US government within 60 days. Our prediction proved to be optimistic by 58 days, in Citi’s case.
Last Friday, amid growing “rumors” and in an effort to calm investor fears, the Dow Jones news reported :
A source familiar with the situation says Citi isn’t in “any unusual discussions with the government.”
The “calming” effect was short lived as two days later the news broke that Citi was indeed in talks with the US government in a deal which could result in a 40 per cent stake in the failing bank. Today, the deal was finalized and the US government will convert it’s preferred shares into common. Dilution of common shares are expected to be as high as 75 per cent.
Citigroup also announced a US$10 billion 4th quarter loss and the suspension of dividend payments on common and preferred shares. The market reacted to the news by reducing the value of Citigroup shares by 40 per cent as shares slid to a new all time low of US$1.50.Â The selling continued into after hours andÂ traded down to US$1.41. Citi shares have now dropped below their US$1.50 ATM fee.
The shareholders have essentially been wiped out.
In January 2008, $ingapore’s GIC invested US$6.88 billion in CitiGroup. It has now converted its preferred shares to common shares and realised what were previously paper losses. $ingaporeans have lost perhaps as much as US$5 BILLION.
While GIC’s ownership has increased from 5 per cent to 11 per cent, essentially the value of the shares has evaporated. It is clear that Citigroup are insolvent ie bankrupt.
The head of $ingapore’s Government Investment Corporation, Lee Kuan Yew, has not resigned.
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