In October/November, 2008 New York-based CitiGroup received $45 billion in preferred shares from the U.S. Government. At that same time the Government agreed as a further ‘backstop’ to absorb up to $250 billion of just over $300 billion of ‘toxic assets’.

An article yesterday said as a result of a conversion of up to $25 billion of that $45 billion in preferred shares to common stock, the U.S. Government will boost its common shareholding in CitiGroup to up to 36% in circumstances where private investors convert a like number of preferred shares to common shares. The result could be that existing common shareholders will be diluted by up to 74% – leaving them with as little as a 36% common share interest in CitiGroup. This conversion (characterized in the article as “the latest rescue”) does not inject more capital into Citigroup. What it does do is give “the government more of a voting stake and far greater influence over the bank’s operations, short of outright nationalization”. The agreement will boost Citigroup’s tangible common equity ratio , a measure of capital, to between 5.4 % – 8.1% from the fourth quarter’s 3.0%.

The article states that “Shares of Citigroup closed down 39 percent on Friday, and touched their lowest level in at least 18 years. The market value of what was once the world’s most valuable bank has fallen to $8.2 billion from a peak above $270 billion roughly two years ago”. Moody’s Investors Service cut Citigroup debt one notch to “A3,” its fourth-lowest investment grade, saying Citigroup is likely to shrink”. Standard & Poor’s affirmed its “A” rating, a notch higher.

Concurrently, Citigroup will halt dividends on preferred and common stock, but maintain payouts on trust preferred securities.

My Comments: First, I had to read two articles carefully and make a number of calculations in order to ‘sort out’ exactly how (I think) this complex arrangement works. I should not have had to do that if those reporting the transaction better understood how to explain share conversions and dilution percentages. Second, based on my assessment of the arrangement, it does not strike me as commercial. In the ‘private sector’ world as I know it ,the existing common shareholders would end up with little or nothing as contrasted to 36% of the potential number of common shares ultimately outstanding. I can only assume the:

• assume private investors who apparently have agreed (according to the articles referenced in this blog) to convert preferred shares at a price based on $3.25 per common share must believe their preferred shares are worth little if anything without this deal;

• assume the fact that the U.S. Government and the existing common shareholders each potentially end up with a 36% common share position is not coincidence and that, consistent with what it has been saying for the past several days, the U.S. Government does not want to nationalize this (or likely any other) bank; and,

• conclude that on the balance of probabilities we have not heard the last of CitiGroup in the context of U.S. Government ‘bailouts’, and in the end the 36% common share interest owned by now existing common shareholders will be further diluted – and likely by not a small amount.

Read the articles I read when developing this post by clicking here (first article) and clicking here (second article).

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Fannie Mae (FNM.P) Thursday reported a $25.2 billion Q4 loss, and said it needs $15.2 billion under a senior preferred stock purchase agreement with the Treasury to fund a deficit in its net worth. In an article yesterday it was reported that Fannie Mae’s Q4 loss was 7X its loss in Q4 2007, and that it lost $58.7 billion in calendar 2008. The article quotes a Fannie Mae spokesperson as saying “We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth”. The article also said that “Fannie Mae said the deterioration in housing and credit markets reduced the fair value of its net assets to a negative $105.2 billion in December from $35.8 billion at the end of 2007”.

My Comments: I summarized this article simply because I think it is an important bit of news. Those readers who have been reading my blog posts on a regular basis will know that while I would not have been able to predict the quantum of Fannie Mae’s now reported Q4 2008 losses that directionally I expected them. I also expect such losses to continue and likely escalate going forward. If I am right this will mean that the U.S. Government (read the U.S. taxpayer) will be required to fund more Fannie Mae losses going forward.

Read the article by clicking here.

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David Morgan, a well-known silver commentator, recently wrote a Seeking Alpha article where he comments on how he (or as it turns out, another author) believes silver will perform in a deflationary period. He begins by stating his belief that based on history gold actually does best during deflations, rather than inflations – referencing what he calls ‘the seminal work on this topic … The Golden Constant – written by by Professor Roy W. Jastram of the University of California at Berkeley. Morgan says Jastram said that when writing The Golden Constant he found that throughout history silver was intertwined with gold – and then says Jastram asked the fundamental question “Just how does silver perform during inflations or deflations?” and that he concluded that “in most cases, the two metals, yes, both silver and gold, gained operational wealth in deflations”.

My Comments: When I researched the Post Series on this Blog I concluded that gold likely was a ‘safe-haven hedge’ in both inflationary and deflationary periods (read Gold as an Investment – Post 9 of 11 by clicking here). I find silver a far more complex metal to assess than I do gold, given in particular silver supply/demand equation influenced by the fact that much of the new silver produced each year is a by-product of mining activity aimed principally at other metals, and by the fact that approximately 70% of all silver used in the past ‘good economic time’ years has gone into industrial products. As a generalization I think that many ‘gold bugs’ are very locked into their beliefs and positions. From my discussions with ‘silver bugs’ and my reading of some of the commentary they produce, I think that if ‘gold bugs’ walk further out on a tree limb than I typically would, ‘silver bugs’ seem to me to be even more extreme in their outlook and behavior. Morgan’s article doesn’t include his own thoughts and conclusions but relies on those of Jastram. I have placed an order for Jastram’s book and will give you my views on what Jastram said after I have read it.

Read the article by clicking here.

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President Obama yesterday put forward his 2009 Budget Proposal. If implemented without change it forecasts a 2009 Budget Deficit of $1.75 trillion. His budget calls for a spending plan of $3.55 trillion that would boost taxes on the wealthy, curtail Medicare, and “make way” for a $654 billion down payment on universal health care. The budget inherently must assume U.S. Government revenues of $1.8 trillion for 2009.

My Comments: My review of public data on U.S. Revenues for 2007 and 2008 suggest they were $2.63 trillion and $2.66 trillion respectively (which seems too low). If these numbers are the correct ones to compare with what I think must be the assumed U.S. Revenue forecast for 2009 of $1.8 trillion, that suggests the U.S. Administration is forecasting an approximate 1/3 reduction of revenues in 2009 from 2008. Given the current economic circumstance it makes sense to me that U.S. Government revenues will be down in 2009 significantly. I have been unable to find other commentary on ‘by how much’, and I may in my analysis have picked up incorrect numbers. You can review the data source I used for 2007/2008 U.S. Government Revenues by clicking here. I will be reviewing this and commenting on further posts as I find more data. In any event, no business or household could survive for long by spending twice what it makes, particularly when it has prior accumulated debt equal to approximately 6X its current year expected income (calculated as assumed cumulative U.S. National Debt of $11.5 trillion/$1.8 trillion apparent 2009 forecasted revenue). I continue to wonder whether I am simply getting this all wrong and not assessing things sensibly – or if I am assessing things correctly (or even ‘reasonably’ correctly) how the end game is not a continuing U.S. economic deterioration.

Read an article summarizing yesterday’s budget announcement by clicking here. You can also play a video purporting to ‘grade’ President Obama’s Budget Proposal that accompanies the article.

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