Not feeling so dilutive today…

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.