News

After pushing the ball around a bit, it looks like the automaker bailout could be sent to being voted as early as tomorrow (Wednesday).  If you thought bailing out the banks were unreasonable, you would really be upset at this bailout.  The US automakers clearly first need a major restructure and fire all the top executives who’ve made bad decisions for years.

If you think about it, there’s really not much that’s good about their business model.  The US automakers have:

• No Pricing
• Higher Cost
• Bad Branding
• Products with no edge over competition

Until most of the above are fixed, the automakers will continue to lose money for years to come.

Since the last short post on whether Citi will fall, the government and Citigroup (C) announced today that a $20 billion cash injection has been made by the Treasury Department.  To date, the $700 billion financial bailout has already given Citigroup $45 billion dollars to receive an ownership stake.

Even more importantly though, the Treasury and FDIC announced that they will guarantee a majority of Citi’s whole mortgage security portfolio of $306 billion if they were to default.  More specifically, Citigroup will take the first $29 billion of losses on the risky loans, then 90% further losses will be assumed by the government (the rest, 10%, is still assumed by Citigroup).

The potential losses will made up from the $700 bailout fund, money from the FDIC, then the federal reserve will finance the remaining assets and loan it to Citigroup.

On top of this, the government will get $7 billion in preferred shares of C, along with 254 million shares of common stock at a strike price of $10.61.  The bank will cut the quarterly dividend to 1 cent a share and won’t be increasing the dividend for 3 years unless the FDIC, Treasury department and the Federal Reserves all approves it.  Why not kill the dividend all together you say?  Because some mutual funds are not allowed to own companies who don’t pay dividends.  Citigroup will also place restrictions on executive compensation and bonuses for the future.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

The stock market certainly liked this, The Dow rallied 396.97 points today after the news, with Citi’s shares up 57.82% just in one day!  If you bought Citigroup on Friday, congratulations!  If you are a long term share holder however, it’s unclear how this will play out because in practice, this cash injection actually diluted your shares, not to mention the fact that the dividend is gone.

Oh well!  On to another day’s of exciting news!

In yet another OMG piece of news, Citigroup (C) is hovering around $4 and is in free-fall mode.  It’s amazing to see such a huge financial institution fall from a stock price of $50+ to almost nothing.

The board is currently meeting to asset their options to either sell part or all of the company to potential buyers (which few exists).

Their options:

1. Sell the whole thing, but most companies wouldn’t want the whole company.
2. Sell parts (like the brokerage business Smith Barney or its Global Transaction Services, both of which is doing quite well).
3. Merge with someone like Goldman Sachs, because at least they are looking for deposits (assuming Citi doesn’t get a run on the bank)

It’s hard to see how they can survive because their stock price will be next to nothing soon and perception will be trashed.

Citibank, whatever you will end up doing, RIP.