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| Tuesday, March 16, 2010 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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February 23, 2009 4:38 PM ET
Citigroup’s widely reported proposal to have the Treasury convert its preferred shares in the bank to common equity would bring its capital well over the threshold that some analysts believe the government will deem acceptable under the stress tests slated to begin on Wednesday. But the deal would come at a much greater expense to taxpayers than the Treasury has indicated it would accept under the revised financial bailout plan it unveiled on Feb. 10. The conversion of $45 billion of the Treasury’s preferred shares in Citi to $75 billion in common equity, as several newspapers reported the bank proposed on Sunday, would more than double Citi’s ratio of tangible common equity as a percentage of assets, from 1.5% to 3.9%, according to analysts. Tangible common equity as a percentage of assets excludes preferred shares from the calculation of capital and intangible assets from that of other assets, and is considered the most conservative of various measures that regulators use to measure the health of a bank. Regulators generally say a bank should maintain at least 3% in tangible common equity compared to their assets, and a Feb. 12 article in the New York Times reported that the stress tests that regulators would impose on Citi and other banks with at least $100 billion in assets would require a minimum of 3% of common equity, though it wasn’t clear from the report whether that ratio would include either preferred shares, intangible assets, or both. Following the article, Richard Bove of Rochdale Securities calculated that Citi as well as all the other banks would pass such a threshold if it included preferred shares and intangible assets. Citi’s Tier 1 ratio, a looser measure of capital adequacy, stands at almost 12% of assets, twice what regulators require. The New York Times today reported that Treasury’s stress tests would not require that a specific threshold of capital be met. But the government clearly worries that Citi may not have enough capital to survive a severe downturn. Not only has the Treasury supplied Citi with $45 billion in capital in return for its preferred shares (plus warrants equal to 7.8% of its common), but the Treasury and the Federal Deposit Insurance Corp. has agreed to guarantee $306 billion in real estate assets. And while the Treasury issued a statement on Monday asserting that banks were well-capitalized at present, it reminded readers that it stands ready to supply more funds under the Capital Assistance Program it outlined as part of the revised bailout on Feb. 10. The Wall Street Journal reported today that Citi's proposal would not cost taxpayers more money. But under the terms Citi has reportedly offered, the Treasury would convert its preferred shares to common at a huge premium to Citi’s stock price. If, in fact, conversion took place instead at the current price, taxpayers would wind up with 90% of Citigroup’s shares, not the 40% Citi’s plan reportedly proposes. And shareholders would be diluted by more than twice as much as they would be under Citi’s reported plan. That led some analysts to complain that Citi was asking taxpayers for terms far more generous than it would receive under the Treasury’s new program. “Another *&%# for taxpayers,” observed Henry Blodget on the financial website, Tech Ticker. Added Barry Ritholtz, an investment manager, on his site, The Big Picture: “I don’t for a minute believe it won’t cost taxpayers more money.” While the Treasury’s statement on Monday said it would permit banks to convert existing preferred shares it holds to common equity, it did not say what price it would accept. Nor did it mention the Citigroup plan.
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