Friday, February 27, 2009

Citi Dives, GDP Plunges - Both Off the Cliff

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Washington's mantra should be, "if it's broke, don't fix it and when it's not fixed, fudge the numbers". News of the latest government plan to rescue Citigroup came out this morning as did the revised GDP figures for Q4 2008. Today's government rescue of Citi is the third one in five months. Those rescues followed about half a dozen U.S. government assisted rescues that took place earlier. Note to Geithner, Bernanke, and Obama - doesn't look like what you are doing is working guys, you might want to consider Plan B. Citi's rescue isn't the only thing not working either, all the policy moves to prop up the ailing U.S. economy are fizzling as well and apparently the 'just lie about it and no one will notice' approach is falling apart too. The GDP figures for last quarter had a major downward revision (they are still much rosier than the actual numbers however, so don't get too excited just yet).

The Citibank bailout du jour can be summarized as 'U.S. taxpayers get screwed again' (just another example of how the government keeps your interests in mind). Taxpayers are going to get up to a 36% stake in the insolvent bank that has a net negative worth in exchange for the $25 billion (out of a total of $45 billion) of TARP funds that were previously provided to Citi. The remaining $20 billion of taxpayer provided funding will still be in the form of preferred that pays a dividend, but the option exists for also converting this to the worthless common stock. Other holders of 'bailout preferred', such as the Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors will be paid $3.25 per share for their preferred, instead of being forced to convert it to common stock that traded as low as $1.55 this morning (a deal that is more than 100% over market price sounds good to me - unfortunately only the well-connected rich and powerful get these arrangements, the small investor and taxpayer get the losses).

To say the least, the market didn't react favorably to the government's latest move on Citi. The stock was down as much as 37% at its low so far. Considering the dilution though, existing shareholders could see their stake fall to only 26% of the bank, this was really not a big drop at all. Still, $1.55 is above the penny level usually reserved for stocks in official bankruptcy and is well more than $1.55 above the real value of the company. New York Investing first said Citi was insolvent in late 2007 and well over a year later, the market is finally catching up with us. We have also said repeatedly that there is no such thing as a single bailout for an insolvent financial institution - Citi has shown just how true that statement is.

Another thing New York Investing has frequently pointed out is how the U.S. government is fudging its GDP reports. This blog scoffed at the original Q4 2008 report of a minus 3.8 decline in the economy and pointed out several absurd figures that were being used to calculate this number. Well, the government started to fess up this morning, when it stated there was actually a 6.2% decline in GDP last quarter (a drop of 8% to 9% is more likely). Certainly a step in the right direction, although the government is still claiming that the U.S. economy grew 1.1% in 2008. Maybe this is possible in some alternate universe, but not in the reality that most of us live in.

The next meeting of the New York Investing meetup is on Tuesday, March 3rd at PS 41, 116 West 11th Street (at 6th Ave) from 6:45 to 8:45PM. Click on the link below my name to RSVP. If you are in the New York metro area, you should attend.

NEXT: Technicals Ugly, Risk of Domino Bank Collapses

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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