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..