Monday, November 24, 2008


First off, the federal bailout of Citigroup (C).

After "forcing" Citi to take $25 billion in TARP funds from the Economic Emergency Stabilization Act of 2008 last month, and watching Citi just sit on the money rather than loaning any of it out as was the intent, Treasury comes to Citi's stockholders' rescue by giving it yet another $20 billion.

In exchange, us taxpayers receive $27 billion of preferred stock paying an 8 percent annual dividend, plus warrants to purchase 254 million shares of Citi common stock at $10.61 per share (Citi is trading this morning around $6 per share).

Given that Citi's total market value was less than $25 billion on Friday, it seems to me that we have the short end of the deal. Oh did I mention that we also cover 90 percent of the losses from a $306 billion pool of toxic garbage mortgage-backed and other securities after Citi absorbs the first $29 billion of pretax losses?

Sounds like a real deal for taxpayers! The common stock warrants will represent all of about 4 percent of Citi's total common stock should the warrants be exercised. Even if you assume that Citi's stock returns to its all-time high of some $55 per share, taxpayers stand to make all of $11 billion for assuming what could amount to $60 billion or more of losses on Citi's toxic asset portfolio.

Right now, it's difficult to estimate the extent of possible taxpayer losses. Anything is a guess, given the lack of public disclosure. I'm not sure if Treasury even knows what they've gotten into.

Citi has been badly managed for years. They've been encouraged to create, expand and manage tens of billions of dollars - if not more - of bad mortgage products and other derivative products.

But we had to save Citi. The largest bank and financial conglomerate was again "too big to fail." Citi's failure as a company, if not a bank, would have swamped the economy ad financial markets.

But we did not extract a sufficiently large price from Citi. I can only account for this because the guys running Treasury are all pals with the idiots running Citi - into the ground.

The Obama Rally

The Obama team has put together a qualified and competent economic team. It appears that they will propose an enormous stimulus package upon taking office on January 20. The rally in the market is a reflexive "anything should help" rally, not to mention that the appointment of anybody to fill what has become a vacuum of action in Washington is better than anything.

The Market

We are experiencing a very common rally in a bear market, not a bottoming of a bear market.Even if the DJIA and the S&P 500 were to recover all the way to 9500 and 1,000, respectively, it alone would not suggest the end of the downtrend. Don't forget. We can look forward to at least another year of very bad economic news. AND the auto industry mess is still unresolved.

Unless you are a trader, the best strategy is to take advantage of major rallies to lighten up on equities holdings. I expect that safe, high dividend yield stocks will continue to outperform and a good strategy will continue to be to buy them on weakness.

But don't get fooled. We can look forward to lots more pain.