Bulls come alive!!!

What a day!!! Bulls came alive and the bear had to give in. OK. So now Vikram Pandit (CEO Citigroup) informs his employees in a memo that Citi was having its best quarter since 2007 and was profitable for January and February of 2009. Wall Street certainly loved this news… DJIA rallied 272 points in the morning trade session. My greatest fears are that even this rally might lose its steam, since the performance of Citigroup is directly tied and influenced by the massive capital injections by the U.S. Treasury and the enormous backing by the FDIC. Is Citi truly putting its talent to work, they have decided to finally become lean and for the most part mean by selling of businesses and laying off people (50,000 precisely). These actions definitely will boost its balance sheet and have a positive effect in the short run, may be the next 8 quarters until the Fed Funds rate is close to zero and the U.S. Govt. is willing to take all measures to protect and preserve the financial and banking sector. What next?? If I could formulate the precise regulations which would protect shareholders at the same time spur growth and encourage innovative ideas, then I would be probably be working for the Fed or the Treasury. Anyways, I am hoping Vikram Pandit and his team is truly able to restore some more confidence by sticking to the straight (atleast for now.. eventually buyer and investor beware).

Free Fall of the Dow Jones Industrial Average!!

As we all see the Dow Jones Industrial Average plummet in front of our eyes searching for gravity (6763), the question that comes to my mind is, how did we make it to 14000 just over a year ago, precisely October 2007. What was AIG doing over so many years? a loss of over $60 Billion. I do understand that they lost a lot of money is CDS and insuring NINJA (No income, no job, no asset) loans, but this purely displays incompetent management. The list goes on.. according to me, the Dow Jones Industrial Average needs to replace AIG, GM… and more.

Nationalization

OKAY!! This is truly a hot topic to be writing about. We all just witnessed the U.S. Treasury convert their preferred stocks in CITI to common stocks... now for those who do not understand the difference.. here we go..

Preferred stocks: These are very similar to bonds, in which companies have to issue dividend payments to preferred stockholders after it has fulfilled its debt obligations towards bondholders. But these stocks do not have any voting rights unlike common stock.

Common Stock: Common stockholders have voting rights on the board of directors and can voice their opinion if they feel management is not doing enough to maximize shareholder wealth. The downside is that companies are not technically obligated to pay dividends or return any money to common stockholders in case of liquidation.

Back to Citigroup: The behemoth in the banking sector has been bleeding since a while now, for them not only did the sub prime loan defaults hurt but also the widening spreads on CDS (Credit default swaps). The question is why did the U.S. Treasury convert their stocks and turn into the largest stakeholder of Citi (36%), like I explained earlier, if the U.S. Treasury's $52 Billion investment remained in preferred stocks, then Citigroup had to pay them dividends totaling close to $8 billion a year.. as of now Citi is in no position to manage such an obligation, else they wouldn't require capital injection.. right?? YES... hmmm!!! Now the Goverment has diluted the common stockholder, BUT.. This has become extremely important... lets not think short term here.. Even though Citi's s stock price is at about $1.50, do you think realistically the the price could go below $0.00...(thats not even possible!!) and how much would you loose if you invested in Citi right now. For me the upside is the sky and downside is something I can calculate.. and if your so busy overpricing risk now, after years of underpricing it, then go ahead and get a put option.. so you hedge against your so called potential losses!! Anyways.. more to come later..

Bull Market - YES!!!, wait and watch

December 2007, and since then Wall Street has been bleeding, almost lost half of its value. I wouldnt wanna mention it in dollar terms coz that would sound nothing but horrific; fueling in anger and rage. 

Everybody and everybody's brother who does not even remotely understand corporate finance let alone (option arms, financial tranch, covered calls, credit default swaps, monetary policy, CDO's and SIV'S) is blaming someone or the other for the mess, trying to find the person who is responsible for the doom and gloom. What about all those business schools preaching their students that, the only goal of a company is to determine ways to increase shareholder wealth... Hmmm!!! Since the underlying assumption is to increase it over the long term and that companies are seperate entities which last forever... Until they stumble upon this amazing word (chapter 7 - Complete liquidation).. But then again.. dont we humans expect instant gratification (including me)..  Technically all those Investment Banks did exactly what their shareholders wanted in the short run... Now.. after banking in millions and wiping out the common shareholder... (unlike institutional holders and ofcourse Warren Buffet, since these guys are pretty much happy getting prefered stock and getting a say on the board...hmmm!! guess who runs the company then..) These are those same prefered holders now cribbing that management is incompetent and fraudulent and greedy.. and on and on and on... cap their compensation... wow.. I can write an entire book about why capping someones compensation is the most dumb thing I have ever heard...

Where do I start!! my arguements in the finance class whether Lehman Brothers should have been saved... what about all those complex models that predict systemic risk and the potential impact. If we in America started saving ailing companies which we exactly are... then guess what.. Free market Capitalism is in the toilet!!! Let the Italians save ailing industries.... This is America!! WOW!! I got excited..