Sunday, February 24, 2008

more about citigroup's recent financing deals

announced on 1/15/08, c engineered an 18.4 billion investment package from both on-shore and offshore institutions, 2 prominent individuals and the public. while the nature of the shares issued make it impossible to determine what stake of c that investment converts to, at c's current market cap it represents about a 13 to 15% share.

while more major investments in c and its competitors cannot be ruled out, this 18 billion or so culminates a recent shoring-up operation of the balance sheet of one of the most storied names in finance. it also represents what promises to be an unparalleled transfer of capital from so-called emerging markets to so-called developed ones.

the c financing is not a deal that involves a change in control at all. instead, it's a financing transaction driven by the serious hits the bank absorbed from the subprime mortgage mess and, of course, one shaped by capital pouring into financial services from overseas.

taken at face value, the c financing capital and others are long-term passive investors seeking opportunities globally. none have asked for board representation. a more skeptical reading is that these funds are extensions of government policy, engaging in what some have called "soft diplomacy."

but there's a good case to be made that these capital infusions in these particular banks, like c, not only provide a measure of global stability, but in the long run represent solid investments, with lots of upside. these banks, like c, are obviously not going to disappear any time soon.

all told, c raised about 30 billion over 2 months, a pace and amount one deal insider terms "unprecedented." he adds that several other investors asked to be let into the last deal. but c decided it had more than enough to weather any storm and still has capital left over to take advantage of any opportunities that may come its way as a result of the market and economic tumult.

as a result of these capital infusions, c was able to raise its tier one capital ratio to about 8.8%, far above the 7.5% target level below which it had fallen at the end of the third quarter in 2007. it should also be more than enough to shelter the bank from further mortgage and loan-related write-downs, at least in my own humble opinion. yes, i own c and would recommend purchase here way below 30 a share. i think it trades back into the 40s at least by this time in 2010 (but do your own DD!!).

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