Oppenheimer has a research note out today that calls Tim Geithner an “evil genius. (hat tip Scott)” The genius moniker comes from the steady creep up the capital structure, giving Geithner access to huge pools of money as the Treasury dials for dollars. The evil part has everything to do with the pain this strategy is going to mete out to preferred shareholders and, eventually, bondholders.
The end of Oppenheimer’s piece is worthy of a quote as it demonstrates great analysis from a team that just lost start analyst Meredith Whitney.
Geithner’s Message to the Capital Markets
In his actions if not his words, Secretary Geithner is saying something very pointedly to all the key capital-market participants, and he is saying it to all participants industry-wide–not just Citi shareholders:
To common equity shareholders, he is effectively saying this: “You will be treated fairly and you will be allowed to raise substantial new equity at the reference price, which is roughly the prevailing price at the time that I took office. However, if you bought a $2 or $3 bank stock in hopes of earning leveraged, warrant like returns, on the assumption that Treasury would supply infinite capital and liquidity on favorable terms in perpetuity, guess again. You will be diluted until the right-hand side of the balance sheet has a reasonable mix between common equity and more senior capital.”
To preferred and subordinated debt holders, Geithner is effectively saying the following: “If the bank holding company in which you hold capital instruments is in dire need of common equity capital, then come to terms with them or we will do it for you! You knew at the time that you purchased this paper that they were not FDIC insured deposits, but rather capital instruments of a bank holding company. If the company in which you invested is in dire trouble, you too should share some of the pain and not expect 100 cents on the dollar.”
To the short-sellers of bank stocks, Geithner is effectively saying this: “Take your profits and go home; you cannot drive another major BHC stock to zero. We will never let another Lehman Brothers catastrophe happen. If need be, we will drill through the next $18 billion of preferred equity which would add another percentage point to the TCE ratio, and if that is not enough then there is another $192 billion of Citigroup holding company debt obligations which can be converted and add another ten percentage points to TCE (all of which at $3.25 per share would result in another 65 billion shares being issued), but at the end of the process, however far it needs to go, we are going to end up with a viably capitalized, publicly traded company trading under the “C” symbol. The only thing that is really at issue how many shares of this stock will be in circulation at the end of the process. It is this way with Citi, and it will be this way with any other large BHC.”
Geithner’s Evil Genius, Intraday Report – Oppenheimer (no link)