Citigroup Inc (C)

[Homelands]

Very Well Written on Yahoo...

MUST READ FOR EVERYONE-Lets be absolutely CLEAR 28-Feb-09 08:43 pm
I've been reading a lot of comments about the conversion on Friday. Lets go through this..

Basically there are gonna be two distinct groups of preferfs being converted. The governments and the average Joe's--lets make this as simple as possible....

The government's CONVERSION goes like this

The preferred was trading between 4 and 8 dollars Friday

The par value of the preferred is $25.00 per share

Citigroup said they would convert $3.25 of preferred to common shares which everyone knows is trading now at $1.50

Therefore doing the math--if you bought 1 preferred share whose par value is $25.00 and you bought on Friday at say $8.00, then you now have owned 25.00 / 3.25 worth of the common as well. This represents 7.7 shares of the common. But the common is worth $1.50 each--therefore you own 7.7 X 1.5 = $11.95 FOR EACH $8.00 YOU SPEND ON THE PREFERRED. Or another way to look at it==for each preferred (8 that you spend)--you make 11.95-8 = 3.95 PROFIT.

No wonder why everyone was shorting the stock on Friday. They were just capturing the arbitrage of 3.95 for every 8 dollars they spent--that's a 50% profit with NO RISK.

NOW LETS LOOK AT THE COMMON JOE'S CONVERSION

The market thought that they were getting the same conversion rate (ie $3.25), but it clearly states from Citigroup's own website, that the conversion rate WILL NOT BE THE SAME and will be a premimum (a higher number than 3.25). Therefore, it is logical to assume that $3.25 will NOT be the conversion price. But we still don't know what that price will be.

Lets say it's 5.00--then do the math--
25.00/5.00= 5 shares of common. 5 shares of common at 1.50 each is $7.50. If you bought on Friday for 8 dollars--you just lost 50 cents per share. Therefore you would want to unwind the short position right?

Only problem is-- you didn't short 5 shares--YOU shorted 7.7 shares. You could take the loss on the 5 shares at 50 cents a share. But that still leaves you with 2.7 shares to cover since you are basically NAKED short 2.7 shares RIGHT?

That's my point-- depending on the conversion number (and I hope it is very high), those who shorted C on Friday for arbitrage are gonna get hammered since they in effect shorted too much common, because they used the wrong conversion price of $3.25 . Bottom line is this-- the higher the number from 3.25--the stronger the short squeeze.

Stay tuned-- this is gonna be interesting

GLTA