Today, Citibank decided to sell stock at a very high premium to a foreign firm, signifying that it is in dire straights. I want to take a look at how the deal was not in the best interests of anyone but the foreign firm, and ponder how the government could continue to let Americans drown in the subprime mess. I am tired of hearing the "let the markets work it out" speech. If the markets or CEO's could work out such messes, they surely wouldn't have recession fears as high as they are today.
Abu Dhabi has bought about 5% of the Citibank shares, paying a coupon rate of 11%, far above almost any bond traded in the US markets. This means that not only was Citibank in dire straits for liquidity, the investment group in Abu Dhabi was reluctant to provide it. However, Citibank is facing not only falling stock prices, but an $11 billion writedown next quarter. They needed funds, and they needed them fast.
The question I put forth is, should a foreign firm be allowed to own this much of Citibank? And, can this transaction be profitable for both Citibank and Abu Dhabi? I do not believe that an 11% coupon rate is beneficial for Citibank, and they should have looked elsewhere for the funds. This means that for each dollar the foreign firm provided them with, they will need to get at least $1.11 back to make a profit. Now with the credit crunch intensifying, and all government officials sitting on their hands, the interest rates on all loans falling, it seems like they would be hard pressed to turn this money into any form of a profit.
Facing another possible cut in the federal funds rate in December, the prime rate of interest is only likely to garner something around 7% for these banks. This, coupled with the transaction costs that banks endure, make it unlikely that taking these funds was the best decision for Citibank. 11% coupon rate is even higher than what most junk bonds are paying these days. Junk bonds are those rated as sub-investment grade by Standard and Poor's, meaning they carry a high risk of default. This 11% seems to be a major signal to people that Citibank is in more trouble than originally reported, forcing them to pay such a high risk premium for funds.
What would the alternative be? Perhaps a cut in the CEO's paycheck? We all know that will not happen, but new leadership is called for. They are already talking about scaling back many operations, given that the stock is below $30 for the first time in several years, and the economy looks to head toward recession as our leaders are willing to stand on the sidelines. I would claim that instead of taking such money on such a high risk, Citibank should have tried to weather the storm, cutting where necessary, and getting in some new management at a lower salary.
Investors are looking at this move as positive, I see it as only negative. This shows the lack of intelligence of corporate America, proving that what is best for Wall Street is not even close to what Main Street needs. What is best for the nation is for our leaders to stand up and collectively bail out the subprime mortgage mess. Will home prices falling another 4.5% according to today's report, the downward spiral will not be resolved by the markets without many ordinary Americans enduring much pain.
While Congress and Bush are squabbling over how many billions to provide for Iraq, many Americans standard of living is simply ignored. Many were bullied by the big firms, and the government only seems concerned about those huge corporations.
I find it simply unbelievable that the government would let such a deal as was done by Abu Dhabi go through without caring for the ordinary Americans on the other side of this mess.