In a post last week I suggested that Citigroup (NYSE: C) was too big to fail. Knowing that the government was likely come to its rescue, I suggested that C was a buy.
However, I had no idea that the government would step in so quickly. And step in it did, letting the world know that Citigroup was indeed too big to fail.
Over the weekend, the government negotiated a deal with Citigroup that should go a long way in helping the company find its footing in this crazy market environment.
The deal announced on Monday provided a boost to C shares. The stock traded up between 50% and 60% throughout the day.
It has been a spectacular rally indeed, but at what cost?
Is government assistance really good for shareholders? The jury is still out, but there is one very compelling reason to believe that the end of the credit crisis may finally be near.
Specifically, the government is injecting $20 billion of capital, but it is also providing a backstop on up to $306 billion of risky loans on Citigroup's balance sheet. In return, taxpayers will receive $7 billion in preferred shares and warrants to buy up to $254 million shares of common stock at a price of $10.61.
It is the warrant component that is very telling to me. In some of the other injections of capital, investors had been receiving warrants with strike prices well below current market prices. Warren Buffett's investment in Goldman Sachs (NYSE: GS) is a good example of such terms.
In this case, the warrants are priced more than double the price available in the open market. That means Uncle Sam will exercise the warrants if, and only if, shares of Citigroup trade above the strike price.
Should that occur, investors at current prices will be more than willing to accept the dilution that would happen with execution. The point is that the government deal should be interpreted as good news for common stock shareholders.
While the rally Monday can be explained by massive short covering, there is more to it. The government is finally getting the hang of negotiating these deals and doing so without destroying confidence. That is why the stocks were up big.
I would still be comfortable buying Citigroup shares at these levels.
The big-money, short-term trade may be over, but the long term looks bright for C. The government has made sure of that with its actions today.
I think a double or more over the next 1-3 years is certainly plausible.
Jamie Dlugosch is a contributor to NavellierGrowth.com.
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Reader Comments (Page 1 of 1)
11-24-2008 @ 8:41PM
James said...
You got to be kidding!!!!!
James the less
11-25-2008 @ 1:50AM
BHarrison said...
This sounds fine for those who have the capital and are willing to invest at this point; however, for those Americans who do not have the cash to invest, this is merely a dilution of their et value and/or the value of their money/income.
The American people have been substantially defrauded; and now their standard of living is being further reduced to offset the loses taken due to the frauds that have been committed. Yet the CEOs, CFOs, and upper managment are still raking in their exorbitatnt salaries and compensations . . .
11-25-2008 @ 4:26AM
Looker said...
Is he kidding? He must be kidding! The economy is bleeding from the jugular, and yet the government keeps throwing band-aids, beach towels and such on the wound. The one thing they can't--and won't do is FIX the wound. Great info on how this is going to play out at http://www.endtimesroundtable.com , and it isn't gonna be pretty.
11-25-2008 @ 2:57AM
BHarrison said...
I've never been one for the "conspiracy nut cases"; but I think that the extent of our political and economic situation fairly well demonstrates that the radical elitist/ultr-wealthy special interests groups such as the Bilderberg Group, and the Tri-Lateral Commission have effectively been controlling our political system via their behind the scenes control of BOTH the Republican AND the Democratic parties, and their control of the Fed and the FIs - Financial institutions. Even NOW, the vast majority of Americans do not relaize that the Fed, the Federal Reserve, is NOT a government agency; that it is a PRIVATE CORPORATION of the most wealthy "banks" in the world (foreigners) who control our financial institutions. They put an American "frontman" such as Greenspan in charge as a figure head; but the control of the Fed is by 'WEALTHY FOREIGN BANKS". This information is a matter of public record;, and often referred to inpublic comments about the Fed; but most Americans are simply oblivious to it because they are too apathetic to even try to understand what is going on. Americans feel impotent about being able to do anything about these situations, so they do nothing; and the situations progressively worsen. If everyone would make repeated attempts to raise hell with their Congressmen some improvements might be possible. Do nothing; and nothing will improve.