A few days ago I reap praise on Government of Singapore Investment Corp (GIC) for saying ‘No’ to Citigroup; I said it too soon.
I cannot believe that GIC have agreed to convert all their preferred shares in Citigroup into common stock. Now the price of US$3.25 is far below the originally agreed conversion price of $26.35 a share, but there’s a few thing we must consider:
1) Citi’s closing price on Thursday is at US$2.46 a share!
2) By converting, GIC will lose the 7% annual dividend that it has been receiving if it chose not to convert its holdings.
3) based on Thursday’s closing price of US$2.46 for Citi shares, GIC will now suffer a US$1.67 billion loss
4) data clearly show that the U.S. recession is going to get worse before it get any better with the U.S. economy shrinking more than expected in the fourth quarter of 2008
5) U.S. government has just taken a 36% stake in Citigroup (I don’t care if the Americans don’t want to admit it, that’s a nationalization of a bank)
6) GIC is now the second-biggest shareholder in Citi with a stake of about 11%, and Citi’s shares plunged 37% to US$1.55 at the start of US trading on Friday after the bank’s announcement. GIC is paying US$3.25; the current price is US$1.55. Do the math!
7) The profitability of all US banks is likely to be impaired in the next two years’ and Citi is still in danger
Now if Citigroup is still a viable entity, there will be no need for much a dramatic effort by the U.S. government to prop it up. GIC is making a loss investing in an ailing bank in a weak market with poor economic outlook on the horizon. After all this, can someone from GIC please come out and explain why in the bloody world they will do the conversion.