Thursday, March 5, 2009

Fees and stock valuations

Huffington Post today published a snarky little piece listing a few things that cost more than a share of Citigroup, Inc. One of them is a transaction at a Citi ATM. Under certain circumstances customers are charged a $1.50 fee to use their debit cards at Citi ATMs. At market close today, a share in the bank would set you back a dollar and two cents.

In December 2006, Citi traded as high as $57 a share, which puts its current value at about 1.8% of what it was valued at nine quarters ago. Hell, Marketwatch says Citi has lost 85% this year alone.

So what did the smart guys at Treasury and the Fed do back in February? They bought more equity in Citi, that's what. Ritholtz published a fine rant about it when it happened. His case boils down to this: the Fed and Treasury have 1. spent $25 billion for a 7.8% stake in Citi; 2. guarenteed 90% of the value of $300 billion in Citi's assets; 3. lent Citi another $20 billion; 4. converted taxpayer-purchased preferred shares to common stock -- that is, turned what was pretty much a pile of IOU's into a pile of shares in the bank.

Americans now own about 40% of Citi. And we only spent $45 billion for it.

Too bad the market capitalization for the whole company stood at $5.56 billion at today's close.

Let's see.... 40% 0f 5.56 = 2.224 and that's ... ummm ... almost 5% of 45. So far, we Americans have lost 95% of the money spent bailing out Citi.

Now you might (or might not) recall that Citigroup came into being in 1998 with the merger of Citibank and Travelers Insurance, which owned Salomon Smith Barney, in a deal that skirted the edges of the Depression-era banking law commonly called Glass-Steagall and probably actually violated it. Commercial banks like Citi weren't allowed to run investment services like Salomon under the existing banking laws. PBS's Frontline series has a nifty time line on the transaction here. (It's notable the program that link refers to was aired in 2003.) The following year (1999) saw the passage and signing into law of the Gramm-Leach-Bliley Financial Services Modernization Act which effectively erased any problems the merger of a bank with an insurance conglomerate which owned a major investment house might have had with laws intended to prohibit any such financial cross breeding.

Ten years on, one has to ask how's that working for us?

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