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Citigroup Bailout Math

March 2nd, 2009

If I’ve got this right, the government currently has billion of preferred stock in Citigroup which it’s willing to exchange into common stock at .25 per share but which for the time being is paying 9% 5% interest, or .25 .25 billion per year. If the government converts all of that stock, it will receive in return about 7.7 billion shares of Citigroup. That’s a lot of shares. But at today’s stock price of .60 per share, those 7.7 billion shares are worth only .3 billion.

What would you rather have, a fixed income of .25 billion a year, or stock worth .3 billion? If the Treasury issued a bond paying .25 .25 billion a year, that bond would be worth about billion. Evidently a similar obligation coming from Citigroup is only worth billion. I think we can safely conclude from this that no, Citigroup has not been nationalized.

Update: James Kwak has more detailed arithmetic.

Update 2: Jim Surowiecki emails to point out that this preferred stock is actually paying a coupon of 5%, not 9%. It only starts paying 9% if shareholders vote not to accept the dilution — and in that event the coupon increases quarterly until it hits 19%!

Related Links
What’s Happening to Citigroup?
The Citi Franchise
Citigroup vs Treasury





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