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Tuesday, January 15, 2008

Stock Investment Dilution - Citigroup as an Example

Say you own 100 shares of Citigroup, and you bought it a few years ago. Your investment was probably based after considering such factors as PE ratio, earnings per share, debt, dividend yield and the company's earnings prospects going forward.

As we all know, Citigroup was heavily involved in the sub-prime fraud. I call it fraud, because when you have ratings agencies such as S&P, Moodys, and Fitch slapping AAA ratings on debt paper which then pays off at $0.20 on the dollar (if that!), something was definitely fraudulent. Anyhow, so now Citi (among many others) is in trouble and the stock has fallen from the mid 50's to the high 20's. Ouch. We find out today that the company is laying off thousands and cutting the dividend, which could be expected.

What bothers me (other than the fraud, the Treasury dept. "looking the other way", and the subsequent bailing out of the Wall Streeters by lowering interest rates and deep 6'ing the US dollar) is how Citigroup is now raising money by selling preferred securities (private offerings) to the government of Singapore, a Kuwaiti investment group, Saudi Prince Alwaleed bin Talal, and others. This is all legal so long as the board of directors approves.

Even though it's "legal", what about the poor bastards I described earlier that bought Citigroup a few years ago taking common investment considerations into account? Haven't their investments been diluted by the issuing of the preferred securities? Of course they have! Were they given a chance to subscribe to these securities - the press releases say so, but the truth of the matter is that the offerings were over subscribed even prior to the press releases, so in reality, the common "joe-blow" on the street had no chance to get in on the same terms.

Just another example of Wall Street shananigans that increasingly are putting the individual investor at a disadvantage. Think this doesn't affect you? Well, it does if you own mutual funds which own Citigroup and the other companies that are behaving similarly.

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