Trader Talk

Citi—Today's $42 Billion Question

Can the market handle $42 billion of Citi stock on the market?

Negotiations between the government and Citi are in a very delicate stage.

First, here's what the government owns:

1) $20 b in Trust Preferreds, paying an 8 percent dividend;

2) 7.7 billion shares of common stock;

3) $7b in additional preferred stock that was given to the government in exchange for a "ringfence" of roughly $300 billion in assets, paying an 8 percent dividend.

Most traders I have spoken with feel that the third asset will not be touched, because that is sitting on Citi's balance sheet with a very low risk weighting, since the government is backstopping it. If they remove it, Citiwill have to put up additional capital for the increased risk of holding those assets.

That leaves the $20 billion in Trust Preferreds and the 7.7 billion shares of common stock. Most traders believe that they will have to do the deal together, because if they don't that 7.7 billion shares will be an overhang on the company for months.

So do the math: let's assume that the government will require Citi to raise $15 billion in equity to buy back the $20 billion in Trust Preferreds (the remaining $5 billion in cash).

Second, assume the government will sell 7.7 billion shares at $3.50 = $27 billion.

$27 billion plus $15 billion = $42 billion in Citi stock dumped on the market.

Can the market handle that on December 12th, or any day this month?

They did with Bank of America , which floated almost $20 billion a few days ago.

But that's half of $42 billion. Will the stock drop below $3 as a result (currently at $3.88)?

We don't know, but most traders seem to feel that this is the right time to do it.



Questions?  Comments?