This weekend marked yet another interesting event, the rescue of Citigroup by the US Government. For full disclosure I am hesitant to call it a full-blown rescue mostly because up until the past two weeks Citi was for the most part very well capitalized, even so heading into this weekend. But the sharp collapse in its stock price last week prompted C’s executives to concoct a plan to restore investor confidence in the banking behemoth or suffer unknown dangers.
My opinion on the Citi so called rescue was positive, it showed the government was more than willing to come to an agreement in order for one of the world’s largest banks to stabilize itself. In addition, it was accommodating for shareholders, as they will not get highly dilutive, something we did not see with AIG. The government will get preferred stock with a 8% dividend in addition to warrants of 254 million common(5.45 billion shares outstanding) stock valued @ $10.61/share. For that the government will backstop a large portion of $306 billion in assets.
As far as other banks go I’m hesitant to call Citi’s rivals such as JP Morgan Chase and Bank of America healthy. Both firms suffer from much the same as Citi did, although both JP Morgan and BofA have a better group of mangers running their respected banks. During 2009 I believe we will see more bailouts that reflect what Citi just went through, potentially with both JPM and BAC. Once again I do not think any rescues will be highly dilutive to current shareholders.
Financials certainly are living in a different world, long gone are the days of excessive leverage and rampant compensation. Even though the global economy is in a deep recession (or starting to go into one) we will one day grow again and many global large banks will once again perform and make tons of profits. With that said I believe there is long-term value in all names listed. In the meantime we will have to deal with more losses on the majors balance sheets due to the crippled housing market and the sick consumer.
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