Wednesday, January 14, 2009

How they spend the TARP Money

div·i·dend (div- i-dend')
1. Mathematics A quantity to be divided.
a. A share of profits received by a stockholder or by a policyholder in a mutual insurance society.
b. A payment pro rata to a creditor of a person adjudged bankrupt.
a. A share of a surplus; a bonus.
b. An unexpected gain, benefit, or advantage.
[The American Heritage Dictionary, 4th ed.]

If you read the financial press you may think there is something wrong with the venerable Citigroup. They seem to imply that the recent government investment in Citi is some kind of “bailout”. In addition, the press insists in propagating malicious rumors about Citi desperately needing new capital. According to these rumors, Citi would be ready to sell asset at “fire-sale” prices. In fact, they are even trying to portray Citi’s latest strategic move, the new joint venture with Morgan Stanley, as a desperate move to raise the pittance of $2.7 billion.

Fortunately for us, firm believers in the infallibility of financial markets, there is plenty of evidence that Citigroup is as strong as ever. How do we know? As any financial text will tell you, there is no stronger signal to a company’s health as its dividend to common stock. Citi, of course punctually paid a $0.16 per common share on xx/xx/08. In fact, according to their quarterly cash flow, Citigroup paid $6 billion in the three quarters to 9/30/08 ($10 billion in 2007, if you care), more than twice what they will receive in cash for 51% of Smith Barney.

Do you think that the brightest bankers in Wall St. would pay $6 billion in dividends if they needed cash? In fact who in their right mind would pay such a large dividend while raising equity? Not Citi, unless you count the $4 billion of common equity they issued in 1Q08. Wait! Issuing equity to pay dividends sounds like a Ponzi scheme. Well, only if you think money is fungible.

This begs another question, if Citi needs taxpayer money, where do they get the money to pay dividends? Better yet, why do they continue to pay dividends given that they are desperate enough to need taxpayer money? If I were Citigroup, I would stop paying dividends to conserve cash. After all, dividends are discretionary payments which means I can cut them zero. Likewise, if I was the US Treasury or the Fed, who are supposed to look after the public funds they dispense, I would ask Citigroup NOT to pay dividends while they owe me money. Otherwise, it may look to “The American People” like they are using taxpayer dollars to satisfy someone’s fetish for a predictable dividend stream.

So long as we are on the subject, have you asked yourself who gets these dividends, which lately seem to come from taxpayers dollars? Citigroup shareholders, of course, which include, as far as I know, a member of the Saudi Royal family, several institutions around the World, and Citigroup employees.

The last group deserves special attention. If I am not mistaken, Wall St. banks like to compensate their employees with restricted stock. I think restricted, in this context, means that they can not sell the stock for a period of time. However, I do think they collect the dividend. That means that the money, if fungible, goes from the taxpayer to the accounts of the holders of restricted stock some of whom are responsible for setting dividend policy. As the Church Lady would say, “isn’t that special”

In the United Kingdom, a similarly structured allegedly capitalist society, the government also had to make a “capital infusion” to shore up the banks. The first thing they did was to abolish dividend payments.

If you think Citigroup is unique, I suggest that you take a look at any American bank receiving public funds. According to the US Treasury, if forced to forego dividend payments, many banks would not “participate” (meaning they would not accept the bailout money.)

There you have it, these guys are so smart that they have convinced the US government that they need to be enticed to accept a bailout. Sweet!

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