Friday, April 17, 2009

bought preferred shares and sold short common stock with the hope of exploiting the difference in prices between the two securities

TO BE NOTED: From Bloomberg:

"Citi Will Complete Preferred Swap After Stress Test (Update1)

By Edgar Ortega

April 17 (Bloomberg) -- Citigroup Inc. delayed the conversion of as much as $52.5 billion in preferred shares until after the U.S. government completes its so-called stress test of the health of banks.

Citigroup said in a statement today that it was making progress on meeting regulatory requirements to proceed with the conversion and left the terms unchanged. The Federal Reserve and other regulators aim to release the results of stress tests on the 19 biggest U.S. banks on May 4, a central bank official who declined to be identified said yesterday.

The New York-based lender had previously expected to win regulatory approval to complete the deal by early April. The delay may exacerbate losses among hedge funds and speculators who bought preferred shares and sold short common stock with the hope of exploiting the difference in prices between the two securities. Citigroup stock has almost tripled since Feb. 27, when the exchange offer was announced, making the arbitrage strategy more costly.

“This has caused huge mark-to-market losses for investors who initiated the trade shortly after the deal announcement,” Sveinn Palsson, a derivatives strategist at Credit Suisse Group AG in New York, wrote in an April 16 report to clients.

Citigroup shares rose 16 percent to $4.65 at 7:11 a.m. in New York after the bank reported a smaller per-share loss than analysts estimated for the first quarter. The stock has advanced since February as investors who sold shares short to finance their purchase of the preferred securities unwound the trade.

Third Bailout

Under terms of the deal, the company will swap as much as $27.5 billion of its preferred securities at a conversion price of $3.25 a share. The U.S. Treasury will convert as much as $25 billion of preferred shares, gaining a 36 percent stake in Citigroup.

The exchange is part of the U.S. government’s third attempt to shore up Citigroup, which has been battered by $88.3 billion in credit losses and provisions for bad loans since the start of 2007. The conversion would help Citigroup save money on preferred dividends and increase its tangible common equity, a measure of the bank’s ability to absorb losses.

Citigroup today ended a five-quarter losing streak by posting a $1.6 billion profit on gains from an accounting rule that helps companies in distress.

To contact the reporter on this story: Edgar Ortega in New York at"

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