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Citi Bailout 3.0
Can a month pass without a Citigroup bailout? According to The Wall Street Journal, the Treasury Department has agreed to take on a 36 percent stake in Citigroup. Embattled CEO Vikram Pandit will remain at the helm, but Citi will have to shake up its board so it has a majority of independent directors. It is Citigroup's third bailout, the first two having totaled $45 billion. Under the agreement, "the government will convert its stake only to the extent that Citigroup can persuade private investors such as sovereign wealth funds do so as well, the people said. The Treasury will match private investors' conversions dollar-for-dollar up to $25 billion."
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It's the PERFECT time to nationalize. As they need more and more money, and the US treasury buys more and more shares of the company, than they can fire the leaders that ruined the company's finances, and appoint government people to run them.
Our economy is too important to let greed control it / run it into the ground.
The seminal research that Franco Modigliani and Merton Miller won their Nobel Prize in Economics would show that Citigroup's capital structure plan with the government really is not going to make any difference. What drives the valuation of a firm is its business strategy and execution and not its capital structure.
This planned conversion of preferred debt to common equity has done noting to change the business prospects of Citigroup. They still retain a large percentage of illiquid and hard to value assets. They still are experiencing high default rates in credit cards, home equity loans and mortgages. They are still saddled with high costs. They are still stuck with losing businesses in private equity, venture capital and leveraged loans. All these problems are what are driving Citigroup's stock price and business prospects and not its capital structure.
Tim Geithner, Vikram Pandit, many stock analysts and the herd mentality media are too stupid to recognize this simple fact pointed out by economists over twenty five years ago. Americans really should have no confidence in its Treasury Department and the management of Citigroup.
Why does everyone keep saying we are moving to Socialism? We are a kleptocracy. We send billions of dollars to AIG, with no accounting as to where those dollars went. We buy $25 billion in preferred stock from Citi, then convert it to common stock at $3.25 per share, the price drops to $1.70, and we instantly lose $12 billion.
Follow the money, and find out who is getting it.
So we throw more good money after bad?
How the heck does this make sense?
Why should TAXPAYERS foo the bill to support private business?
I say walk away and let them fail!
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