The monumental, and record size, of the Citigroup (C) offering is getting a thumbs-down vote from investors and is being treated as an unnatural man-made disaster. The odd thing about the Citigroup deal is that this is far from a Citigroup issue. Sure, it dilutes the common holder massively for the benefit of paying back the TARP. But this actually still keeps the government in its back pocket because Uncle Sam did not sell any shares in the offering as was supposed to originally happen. That means that as a shareholder, Uncle Sam and every politician can still make the attacks on Citi and its management even if it (hopefully) gets Citi out from under tight compensation oversight. 

The background of this offering is more than interesting. Bank of America (BAC) was the big one. Then came immediate speculation that Citigroup or Wells Fargo (WFC) would follow suit by raising capital to pay off the TARP. What is obvious is that the firms that could pay back the TARP did so at the earliest possible date. JPMorgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) almost had a foot race to see who could get out from under the TARP first. Ditto for Bank of New York Mellon (BK) and State Street Corp. (STT).

The motives for paying back the TARP are fairly obvious, but so is the cost. The $17 billion in direct stock sales at $3.15 compares with a $3.45 close versus a share price north of $4.00 two weeks ago before the sudden TARP repayments came front and center. Add in the $3.5 billion in direct equity units. The government has extended its lock-up period to 90 days now that it is not selling shares alongside the offering today.  After all, it had a substantial profit when Citigroup hit $5.00 briefly in October. That would now be a slight loss as its 7.7 billion share stake came at a price of $3.25 per share.

U.S. congressmen have already threatened that they will conduct an investigation into
the government’s very recent decision that would allow Citigroup to retain billions of dollars in tax breaks over a change of control procedure allowed by the IRS. The sale of the government’s 34% stake (pre-dilution stake that is) was the trigger for this. So this still does not get Citigroup out from under the oversight. That means that any high payouts or bonuses to producers and management are going to face the same or worse public and political criticism than those banks that have already paid back the TARP yet still face outcries over pay today.

Wells Fargo shares have stayed strong throughout its whole repayment process, yet not so for Citigroup. The reason is simple: leverage on the books. This Citi offering should become a blueprint of what not to do if you are a bank indebted to Uncle Sam via the TARP or are trying to get out of any other government-led assistance (rescue) program).  You do not even need to take my word on that. Dick Bove, the influential analyst at Rochdale, yesterday told CNBC that the offering is “Terrible!” and said it may only add pressure to Citigroup and to Vikram Pandit. Mike Mayo of Calyon Securities just called it last night a premature move now that the government is back at a loss in the holdings.

About the only thing that may act as a saving grace is that all of the funds that track the Standard & Poor’s indexes will have to buy millions and millions of shares to account for the suddenly much larger free-float of shares. The problem there is that many will have already started those share purchases, and some will hold off for days or longer to finalize their additions.

Citi’s elementary school report card grade on this offering is a D-. If it drops substantially under $3.15, then it deserves an outright “F” for a grade. More importantly, Citi better not ever find itself back in the position where it needs government assistance again. Even if we get a double-dip recession, that won’t quell a modern day version of a French Revolution peasant revolt and public guillotine scene…. whatever that would really look like today.

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