Citibank and the $20 billion bailout

If you are going to spend $20 billion on bailing out a bank that has a market capitalization of  about $20 billion, then surely you should end up owning the bank?

Not so with Citibank.

Indeed, if you owned equity in a company that had debts far great than assets, then wouldn’t you expect to see your equity wiped out, and that the debt holders would be the new owners?

Not so with Citibank.

Alternatively if a white knight or government came in and rescued the company you would expect again that your shares would lose value wouldn’t you?

Not so with Citibank.

In fact Citibank’s shares are up 50% so far this US trading day after the US Government announced it will guarantee an obscene amount of debt and inject $20 billion of new capital.

Last week at this time I shorted Citibank stock – both through selling the shares and by buying some $2.50 puts. The shares were a bit over $9 at the time, and I suspected that Citi’s time had finally come.

I covered the the shorts and sold the puts at prices between $5 and $3, closing out everything on Friday US time. While I made stellar percentage profits, they were not high dollar value due to the small size of the investments. I sold before the economic values because I suspected that this bailout could happen, and it did.

It needed to happen, but it didn’t have to happen in a way that rewarded the incumbent  management team and the owners of the stock. The equity holders and the management team should both be squeezed out in favor of debt holders, in this case the depositers.

Published by Lance Wiggs