When Citigroup (C) Becomes A Penny Stock

Two years ago, Citigroup shares traded for $55.? Last week, after the government said it might own as much as 36% of the company, the stock dropped to $1.40.? Citigroup is about to become a penny stock like AIG (AIG), which hit this milestone in the middle of last month.

The plan to save Citigroup has two flaws. The first is that it assumes that the bank will not suffer tens of billions of dollars in losses as the year goes by. That has not been said explicitly, but if it is not true, then the federal government will be expected to put much more capital into Citi and will end up owning much more than 36%.

The weak link in the program to sustain the viability of the big bank is the government's requirement that it raise private funds as a condition for the government to do its part. As the BBC noted "The deal does not require extra taxpayer investment, but is dependent on Citi raising extra private capital."

Private investors, whether those are sovereign funds, private equity firms, or institutional investors, are not going to put a dime into Citi equity or debt. The reason is simple. If the company faces more significant write downs, the federal government will have to provide the money to keep the bank afloat. That puts all of the other capital invested in Citi at risk.
Without private capital infusions into Citi, what are the government's options? The answer is that it does not have any. If the big bank needs more capital, the Treasury will have to provide it. Without other alternatives, tax payers will own a larger and larger piece of the firm with each new investment.

When the government announced its intentions, Citi's shares fell by 39% in part because of the dilution that was part of the program to buttress the bank's financial condition. The next round of capital the bank needs, and it will need it because the economy and credit markets are still getting worse, will take the stake that taxpayers own even higher. Citi will become a $.50 ! stock bo ught and sold by day traders. Not terribly long ago, it was the largest bank in the world. Soon it will be listed on the pink sheets.

Douglas A. McIntyre