Citi's Share Price Problem

When it comes to judging the stock market's reaction to the Citigroup bailout, there's only one number that everybody's looking at: the Citi share price, which opened Monday at about $5.80. What does this mean? Two things are worth bearing in mind:

1. Ignore the percentage change, which will look massive, but only because it's coming off such a low base. At $5.80 a share, the stock's up less than $2 -- a perfectly healthy move, but nothing spectacular.
2. This time last week, Citi opened at a distressed level of $9.36 per share. By the close of trade on Wednesday, when it closed at $6.40 a share, panic was setting in -- the share price was so low that absent a major announcement it would almost certainly continue to decline all the way to zero.

At $5.80, then, the stock is still trading at what was, last week, a panic level. That's clearly not a good sign for anybody concerned about the viability of Citigroup, but it also comes as very little surprise, since there was almost nothing in the bailout for shareholders. Yes, they get to keep the full interest and upside on the $306 billion of assets which are being guaranteed by the government. But all the capital injections have come in the form of preferred shares with an 8% coupon -- shares which might look like equity from a regulator's point of view, but which look very much like extra debt from a shareholder's point of view.

As far as the common stock is concerned, little has changed as a result of last night's announcement -- and certainly there's been no change in any ratio based on tangible common equity, or TCE. That's the number which has most worried analysts: Citi's TCE is very, very thin compared to its rivals'. As a result, the Citi share price is likely to remain very low -- and as a result of that, concerns over Citi's future are not going to go away.

It's a vicious bind for the government. On the one hand, it doesn't want to bail out Citi's shareholders -- and indeed it shouldn't bail out Citi's shareholders. On the other hand, however, so long as Citi's stock is in the toilet, the problems at America's largest bank are not going to be considered resolved. I'm not sure how to resolve this dilemma without nationalizing Citi -- which is clearly something Paulson considers a last resort. It hasn't happened yet, but don't rule it out completely.