February 24, 2009
The preferred/common share swap proposed by Citi to USG should be rightfully labeled as anti-dilutive, rather than dilutive. For one, you can’t really dilute a share that’s posting one penny of dividends per share. Secondly, USG is practically already calling the shots on management and certain loan policies, as outlined by Mr. Pandit’s promise to add $36.5 billion on its books to ease political pressures. More importantly, the measure takes away the government’s priority to Citi’s cash, softening the terms of the government’s loan/investment. Now, I do not expect the government to be holding on to its common shares after Citi restores its financial health, a sentiment expressed by the Fed’s statement today. More likely, I see an offering of government shares to private hands or a buyback at a premium price commensurate with the political demand to make a profit on the taxpayer investment.
This sounds all too benign, but if true, this might be the first step to restoring market confidence, provided that the government communicates its intentions clearly.
February 18, 2009
Apparently, the Obama administration is going to subsidize $75 billion in mortgage payments to nine million American households in the name of debt relief. So now we now have a government put-option aimed to help speculators in the event that they paid for too much on the speculation and can’t dump it off at a profit. Aside from the fact that the government is encouraging speculative behavior with this outrageous subsidy, how important are nine million votes (mortgaged for 30 years) in national elections? For the first time in history, we might have a situation where the term on someone’s mortgage isn’t related to a household economic decision but a ploy to keep the allegiance of a group of voters.
February 15, 2009
-The transmission mechanism from the forex market to the real goods market is all messed up. When countries have faced massive capital outflows in the past, they were able to export their way out of the problem thanks in part to weaker currencies. But the countries facing massive outflows today, particularly those in Eastern Europe, carry liabilities denominated in foreign currencies (USD, Euro). To stay solvent and retire their foreign debt means that they won’t have the luxury to lower the price of their exports.