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04/21/12 | 12:00 AM

Shock Exchange Comes to Harlem

"THROWING GOOD MONEY AFTER BAD" WITH CITI?

CEO Job at Risk?

(Picture courtesy of WSJ.com). The Wall Street Journal reports that the government is considering converting its $45 billion preferred stock investment in Citigroup into common stock. This would move taxpayers' current investment further down the capital structure, i.e., in the case of a bankruptcy (a real risk), taxpayers would be the last to get paid from a sale of Citi's assets. Given Citi's market cap of $12 billion, the government's $45 billion investment represents a de facto takeover already. It is also unclear as to the additional benefits taxpayers would receive by converting the preferreds. It may be more prudent to (i) keep the preferred shares, and (ii) lower the coupon payment (assuming this is "the financial burden" referred to in the article). In exchange for a lower coupon rate, why not request a lower strike price to convert the preferreds? In legal parlance, this is known as "quid pro quo" or "this for that". Under a bankruptcy scenario, taxpayers would then have a higher claim on Citi's assets than common shareholders. Moreover, some sources predict that a third bail out of Citi may cost Vikram Pandit his CEO position. Here is the link to the article http://online.wsj.com/article/SB123535148618845005.html

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