Tough Choices
A little slice of the developing Citigroup rescue:
Regulators were debating various terms of the arrangement on Sunday, including whether the government would receive preferred stock or warrants, which are instruments that give holders the right to buy stock. Preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares; warrants would be more attractive to Citigroup’s existing shareholders, since they would not immediately dilute the value of their investments as much as preferred stock.
What, exactly, is the nature of the debate?:
Regulator 1: Preferred stock would be beneficial for taxpayers, whose interests we represent.
Regulator 2: But warrants would be more favorable for existing shareholders, whose interests we don’t represent.
Regulator 3: This sure is a tough decision!
I’m confused.
UPDATE: Knowledgeable correspondents say the NYT’s summary of these issues is wrong. Warrants could be more favorable to taxpayers under certain scenarios. In particular, if coming to Citibank’s aid results in Citibank shares being much higher five years from now than they are today, then warrants would be better for taxpayers. Basically, under a warrants scenario if the rescue works really well then the taxpayer makes a lot of money.
30 Responses to “Tough Choices”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
November 23rd, 2008 at 7:05 pm
Since the big serious economic policy guys keep making decisions that are manifestly not in the taxpayers’ interest, perhaps you’ll reconsider your wholesale support for granting unlimited buying power to a treasury that is quite clearly captive to Wall Street?
November 23rd, 2008 at 7:08 pm
I think it’s because a stock sell-off that causes the price to go under $5.00 would cause most institutional investors to divest, which is not good for the company or, ultimately, the taxpayer.
November 23rd, 2008 at 7:11 pm
They’ve been so much better-managed than General Motors, obviously their investment bankers deserve the bailout that auto workers have been denied.
November 23rd, 2008 at 7:16 pm
Well, the stock is at $3.77, so that ship has sailed.
But the larger point, I think, stands. It’s probably not the case that regulators are looking to defend “existing shareholders.” (They didn’t do that for WaMu investors, Lehman investors, Fannie investors, etc.) Rather the regulators are looking to influence the behavior of future investors. Since they intend to keep Citi a going concern, they want its common stock to be as attractive as possible going forward. That way, taxpayers may not need to put up quite as much capital. But then, of course, you have to consider whether taxpayers would be better served to just take the coupon on the preferred shares.
That, I imagine, is the cast of the debate.
November 23rd, 2008 at 7:46 pm
I’m a little skeptical about the wording of that article. In particular, I doubt the debate is preferred equity vs. warrants. It is probably preferred equity alone vs. preferred equity plus warrants. In this case, I agree that the latter makes more sense for taxpayers, and is overall the better approach.
The latter is precisely the deal that Buffett made with GE & Goldman (preferred shares returning roughly 10%, plus a boatload of 5-year warrants). It’s also similar to what we did with Chrysler.
November 23rd, 2008 at 7:46 pm
Regulator 4: If somehow Citigroup survives this crap storm, those warrants might be worth a whole lot of upside in the future, far more than just preferred stock dividends.
Regulator 5: Let’s do both. Oh, that’s what we did with the TARP and all those bannks too.
November 23rd, 2008 at 8:13 pm
Some bad elegant variation in that article: why the switch from “more beneficial” to “more attractive”? Lame.
November 23rd, 2008 at 8:23 pm
Regulator 2: But warrants would be more favorable for existing shareholders, whose interests we don’t represent.
Warrants, if exercised, would actually give control of Citibank to the Federal government. Preferred stock may be better in the short run IF Citi pays dividends in the future. Also, in a bankruptcy, preferred gets first crack at payments. Again, that assumes there might be something worth having a few years. Lastly, as everyone above said, common stock may be more valuable in the future than preferred.
It all depends on how much capital gains you might expect in the future versus how much you would expect in the way of dividends. Remember, many people have been urging that the banks stop paying dividends, which would make preferred shares worthless until such time as the banks started paying dividends.
Further to all that, even if the government exercises its warrants, they may not actually take control, just as they have taken ownership but apparently not control of AIG.
It’s the same debate as before: not ‘how much will future payoffs benefit taxpayers’ but ’should we just give the banks money and hope for future payoffs or should we prepare to take control?’
Since this enterprise (the bailouts) makes no guarantees for the future of large banks, much less payoffs, I, for one, prefer that Treasury take ownership common stock by whatever means. I think it’s better to be in the position of being able to take control versus being in the position of lending the banks money to pay the lender (us!) dividends. Worry about getting some recompense in the deal after the economy gets credit.
max
['Don't count your chickens before they hatch.']
November 23rd, 2008 at 9:24 pm
I bet these guys always fly coach. As the precedent stands, if they dont fly at least economy to Washington, there is sufficient reason to deny them monies.
November 23rd, 2008 at 9:25 pm
If all them danged union workers hadn’t a drove up ‘em costs up, Citigroup coulda competed with the for’n companies.
November 23rd, 2008 at 9:54 pm
Before they get any funding, they should spend twelve days scratching out a plan! with crayons. Plans are so important. Otherwise, Congress won’t know what to think!
I sure hope MY is with other high powered public intellectuals tonight, so he can deliver the news from the brightest of the brightest libertarians. It will be cute, and it will not involve giving any of those icky, 70 dollar an hour blue collar people – if you just add on what their parents and grandparents made per hour, which is only fair and just – any money. I think MY and the crewe might want to go to Michigan this holiday season and throw some coins in the streets of some of those yucky industrial towns, see if any of those cute blue collar urchins dive for it. So funny! And a great story to tell back in D.C.
November 23rd, 2008 at 10:35 pm
Could the taxpayers get preferred shares that are convertible into warrants if they became more valuable in the future?
November 23rd, 2008 at 11:59 pm
Thanks to the economic trouble lately, financial term have become the zeitgeits. I’m just a lucky pion with just one money worry, not spending more than what I make. Now I’m getting crash course in ecomonics, it is unavoidable. Sorry about no vote. Warrent vs perferred stock I choose to leave that one to the “bean counters”
November 24th, 2008 at 2:37 am
So Uncle Sam is assuming liability for $300 billion in loans and putting $20 billion of capital into a bank with a market capitalization of $20 billion. If it goes into bankruptcy (where its headed without the cash infusion), the market cap goes to zero.
Why doesn’t Uncle Sam just take the bank lock, stock and barrel? As for the shareholders, in the immortal words of the TV commentator in Airplane, “They bought their tickets, they knew the risk, I say let them die!”
November 24th, 2008 at 3:28 am
http://www.correntewire.com/content/lets-brush-our-german
Boycott this racist website. Post this link on sites in which this site is blog rolled; the “commentary” is vile and pathetic. These people are scum.
November 24th, 2008 at 4:49 am
Why, exactly, *shouldn’t* existing shareholders have their equity diluted, when they’re on fucking welfare?
And why, exactly, is common stock off the table? If the Treasury is going to pony up tax money, then it should by God get some voting rights so it can get out the guillotine and make an example of a few CEOs who fly in private jets, get multi-million $$ bonuses after their stock imploded, or go on expensive luxury retreats.
I don’t support these bailouts at all, but if they’re going to be done why just hand over the money with no strings attached?
November 24th, 2008 at 8:30 am
For a situation of a much smaller scale, the govt received warrants as part of the Air Transportation Stabilization Board loan guarantee deals that were worked out with some airlines in the aftermath of 9/11. Basically, for some airlines (many airlines applied, few were approved), the govt provided guarantees for private sector loans for reorganization, etc that the airlines could not have gotten otherwise. In many cases, warrants for the govt were part of the arrangement, and in most cases the government made money down the road when it exercised the warrants.
November 24th, 2008 at 10:58 am
There is a lot of talk about a large inflationary stimulus to (a) counter deflation and (b) lubricate the reorganization of the economy. In an inflationary environment, appropriately priced warrants start to look much better than preferred stock. If inflation is really required, why are we buying preferred equities? Sounds like a lose-lose situation for taxpayers.
November 24th, 2008 at 2:04 pm
Current price is under $6. The strike price on the warrents is over $10. So the stock price has to nearly double before the warrants are even in the money.
That will be one hell of an effective rescue.
December 14th, 2008 at 3:51 pm
SALT LAKE CITY (ABC 4 News) – While many corporate giants are making cuts and laying off workers one industry is booming. Coupons.com is helping consumers everywhere save a buck by posting manufacturer coupons online. Their
January 15th, 2009 at 1:21 am
laptop battery
laptop batteries
February 8th, 2009 at 9:47 pm
laptop battery
March 1st, 2009 at 5:53 am
viagra
Excellent site. It was pleasant to me.
March 2nd, 2009 at 5:22 am
levitraIt is the coolest site,keep so!
March 11th, 2009 at 4:47 am
I want to say – thank you for this!
March 14th, 2009 at 5:33 am
It is the coolest site,keep so!
xanax
March 22nd, 2009 at 6:20 am
tramadol
It is the coolest site,keep so!
April 2nd, 2009 at 5:27 am
Very interesting site. Hope it will always be alive!
buy cheap viagra
April 9th, 2009 at 1:50 am
If you want to read a reader’s feedback
, I rate this post for 4/5. Detailed info, but I just have to go to that damn yahoo to find the missed parts. Thank you, anyway!
April 15th, 2009 at 11:20 am
Hey, nice tips. I’ll buy a bottle of beer to the person from that forum who told me to visit your blog