Citigroup Datapoint of the Day

David Reilly looks at the yields on Citi's trust preferreds:

One issue of Citigroup trust preferred securities, or Trups, traded yesterday at about $6, compared with a face value of $25. At that price, the security, which pays a 6.5 percent interest rate, now yields more than 25 percent.

Earlier this morning, the issue actually traded at just $4.40, which implies a yield; it was last quoted at just over $5 -- this on a security which pays out $1.62 a year in interest. And as Reilly notes, the government would have to take a severe hit before those interest payments cease:

Trust preferreds are higher on the totem pole than all preferred stock, including the government's. So Uncle Sam would have to forgo his own dividend before the banks could put off paying the trust preferreds.
If the government doesn't get paid, a political firestorm surely would erupt. At a Congressional hearing last week, chiefs of eight big banks trumpeted their payment of dividends to the Treasury on schedule.

If you think that Citigroup is going to be rescued -- if you think that it's too big to fail or be nationalized -- then Reilly's right that the trust preferreds look really cheap right now. But the very fact that they're trading at such a low level means that the market is pricing in a high probability of nationalization. It's clearly not off the table yet.

Incidentally, I'd add one thing to Reilly's explanation of banks' capital structure:

An investor has to consider the totem pole-like ranking of claims on a bank's assets.
The safest place is atop the pole, a perch occupied by senior debt holders. Just underneath are owners of unsecured debt, often bonds.
Lower down the pole comes equity. First is preferred stock, which has a set face value and pays a fixed dividend. At the very bottom are common stockholders who shoulder the most risk, especially from any government action.

There's an important group of claimants missing here: the depositors, who rank in between the senior debt holders and the unsecured debt; for a bank like Citi, there are hundreds of billions of dollars in deposits which need to be covered in full before any bondholders get a penny. The more depositors a bank has, the more precarious the situation of anybody below them in the capital structure. Which includes, of course, the trust preferreds.