The government has decided that, as for your stake in Citi, you want the common instead of the preferred stock you thought you had. Common stock is "one share, one vote" stock. Preferred stock usually doesn't come with voting rights, often comes with a guaranteed dividend, and has a priority claim on the assets of the corporation. Here's James Kwak with a nice overview of the differences between common and preferred.
Somewhat alarmingly, re: Citi: the government is exchanging its preferred stock, for which it gets a 9% dividend, for common priced at $3.25. That's not too far away from double what Citi's stock is trading at right now. And what you get out of common is control of the company, but the government has said it doesn't want to run Citi (though there's nothing in the announcement saying it won't vote its shares or anything). So, a bad price and less guaranteed money in exchange for voting rights that the government will try not to exercise.
That doesn't sound very good, does it? Why would you want it? Well, there's no point in having claims on payment that Citi can't possibly pay, I suppose. Others can evaluate the mechanism of the deal; I'll only note for now that much of the first part of the TARP was given largely through this preferred stock mechanism. Citi may only be the first bank to convert it to its battered, non-dividend-paying common stock. The release:
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8345157d569e201127910f35628a4
Links to weblogs that reference Should Your Tax Dollars Be Spent on Common or Preferred Stock?:
1. Posted by fedgovernor on February 27, 2009 @ 13:11 | Permalink
Democrats, during the last election cycle, lambasted Republicans for pushing a plan to invest Social Security tax dollars in the stock market.
Now that they control the government, the Democrats are doing what? They are investing Federal Income Tax dollars in the stock market.
Huh?
And doing so in the way most guaranteed to ensure that taxpayers never earn a nickle.
Owning preferred shares guaranteed a a return on our investment. Exchanging them for worthless common stock ensures that both the bank, and the taxpayer, never make a dime.
It's not a bug, dude.
It's a feature.
Let's imagine for a moment, just to play a little game, that they're actively attempting to destroy the American way of life, in much the same way as say ... a Bill Ayers might have wished.
How would they do it?
2. Posted by Laughing in Chicago on February 27, 2009 @ 16:05 | Permalink
I bought 1000 shares of Citi at 2.71 yesterday, thinking the announcement can't send the shares any lower. Boy was I wrong. Thank you Obama rescue plan.
3. Posted by Jake on February 27, 2009 @ 21:11 | Permalink
In no way should our government accept Citi common in lieu of Citi preferred, unless all pre-existing Citi common shareholders are wiped out in the process. That result is unpalatable, as it would bring about the nationalization of Citi. But the alternative is to compel the taxpayers at large to subsidize the pre-existing common shareholders by giving them much more than they could expect in a Citi bankruptcy filing.
How wonderful that our new government can do no better than to posit policy decisions that amount to choosing the lesser of two very pronounced evils.
Bah.
4. Posted by fedgovenor on February 28, 2009 @ 14:51 | Permalink
"... unless all pre-existing Citi common shareholders are wiped out in the process."
The government is doing what it is doing so that foreign (read Arab) investors will see their investments destroyed.
After all, the largest shareholder in Citi is the Crown Prince of Abu Dhabi, whose Citi shares, once as high as $55 are now just about worthless ($1.50).
I guess trying to buy America with our own petrodollars in order to take us over didn't work out too well, did it there Mr. Walid?
http://www.cnbc.com/id/29441908
I think there's a message here for other foreign sovereign investment funds who believe they can influence American policy by trying to take over our financial institutions.
Wouldn't be prudent.
5. Posted by Taxrascal on March 1, 2009 @ 21:01 | Permalink
Between income taxes, government debt, mortgages, and the FDIC, I'm pretty sure this news is pretty minor. Citi was 95% nationalized before the crisis even started:
http://www.taxrascal.com/how-much-of-citi-did-we-already-own/328/
6. Posted by commodity tips on October 8, 2011 @ 5:03 | Permalink
Not all the time no one can win the match of stock market trade , humans are bounded with emotions and personal affairs that makes them to take wrong decisions at right time even though they are masters of trade. Markets dramatically change they their flow and no one exactly produce or expect 100% from their profits . Choosing the right indicator or analyzing software blended with human aspect gives better results.
regards:
Commodity Tips
| Sun | Mon | Tue | Wed | Thu | Fri | Sat |
|---|---|---|---|---|---|---|
| 1 | 2 | 3 | 4 | |||
| 5 | 6 | 7 | 8 | 9 | 10 | 11 |
| 12 | 13 | 14 | 15 | 16 | 17 | 18 |
| 19 | 20 | 21 | 22 | 23 | 24 | 25 |
| 26 | 27 | 28 | 29 |
