Tuesday, August 24, 2010

Revisiting the Citigroup-SEC Story

Last month I wrote about the strange disparity between Citigroup's $75mm SEC settlement and Goldman Sachs's $550mm settlement.  Please read my prior piece on the subject, but the bottom line is that Citigroup misled investors as to the risks on $43 billion in subprime CDOs.  The settlement was subsequently rejected by a judge, and today the NY Times gives us an article about judges who have rejected SEC settlements lately.

What I found interesting about the NYT article was the claim

"The S.E.C. calculated that the company realized an economic benefit of up to $123 million from its misrepresentations, but proposed to settle for a fine of $75 million."

Now - how did they come up with that number?  It's a little hard for me to reconstruct exactly when Citi's writedowns occurred, and when they raised capital, but here's what I've scrounged together quickly:

November 26, 2007:  Citi prices $7.5B in 11% mandatory converts to Abu Dhabi
Jan 17, 2008: Citi prices $2.9B of 6.5% convertible preferred stock (public)
Jan 17, 2008:  Citi prices $12.5B of 7% convertible preferred stock (private)
April 30, 2008:  Citi sells $4.5B of common stock ($25.27 a share)

and summarizing from Citi's annual report (page 15):

"During the first quarter of 2008, Citigroup issued $12.5 billion of 7% convertible preferred stock in a private offering, $3.2 billion of 6.5% convertible preferred stock in public offerings, and $3.715 billion of 8.125% non-convertible preferred stock in public offerings.

In the second quarter of 2008, Citigroup raised $8.0 billion of capital through public offerings of non-convertible preferred stock and issued approximately $4.9 billion of common stock. 

In total, the Company raised $32.3 billion in capital in private and public offerings during 2008, excluding issuances to the UST under TARP. See Note 21 on page 172 for further information."

Now, of course, Citi was disclosing larger and larger writedowns this entire time, so it's not as if the effects of the $43B in mis-disclosed assets that were the subject of the SEC settlement were entirely unseen by this time.

So let's get back to the "economic benefit" cited in the NY Times article, which was said to be "up to $123mm."  Does that seems strange to anyone else that, considering that they raised over $32 Billion in capital in the first half of 2008, and another $7.5B at the end of 2007?  Isn't it perfectly reasonable to assume that their economic benefit from their non-disclosure of risky assets could have been a whole lot more than $123mm, considering that investors may have demanded a higher return on their nearly $40 BILLION in capital investment had they known the extent of the exposures?  I'd love to know how that $123mm number was arrived at.


disclosure:  long C

disclosure 2:  I don't know if Citi had disclosed the extent of their Subprime CDO exposure by the time this capital was raised - I don't think they did, although it is possible.  Nevertheless, the question of how the $123mm economic benefit number was arrived at still remains.

1 comment:

Hammer Player a.k.a Hoyazo said...

Citi likely would not have been able to raise any money, anywhere, so the real "loss of economic value" is almost surely far into the billions, nowhere near the "paltry" $123 million you cite in your post.