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• Case | HBS Case Collection | 2013 (Revised from original 2009 version)

  Citigroup's Exchange Offer

  Robin Greenwood and James Quinn

  Citigroup faced considerable distress in early 2009. In late 2008, the bank had accepted $45 billion in preferred equity from the United States government via the Troubled Assets Relief Program (TARP). Yet, the stock had continued to slide in early 2009. In late February, the company announced that it would convert as much as $50 billion of preferred stock into common stock, at $3.25 per share. The case asks students to evaluate the pricing of preferred stock relative to common stock at this time. As the case takes place during a period of considerable uncertainty in global capital markets, and conventional sources of arbitrage capital have been depleted, the apparent mispricing may not be as attractive as it initially seems. In the B and C cases, students must decide whether their view of the appropriate pricing changes, when the apparent mispricing worsens. A final additional teaching point relates to the formation of a synthetic short position using the options markets.

  Keywords: Financial Crisis; Capital Markets; Banks and Banking; Stocks; Price; Globalized Markets and Industries; Financial Services Industry;

  Citation:

  Greenwood, Robin, and James Quinn. "Citigroup's Exchange Offer." Harvard Business School Case 210-009, May 2013. (Revised from original July 2009 version.)

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• Working Paper | 2013

  Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly

  Malcolm Baker and Jeffrey Wurgler

  Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks' leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks' low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a ten percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.

  Citation:

  Baker, Malcolm, and Jeffrey Wurgler. "Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly." NBER Working Paper Series, No. 19018, May 2013.

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• Case | HBS Case Collection | 2012

  Restructuring at Nova Chemical Corporation (Abridged)

  Scott P. Mason and Malcolm Baker

  Citation:

  Mason, Scott P., and Malcolm Baker. "Restructuring at Nova Chemical Corporation (Abridged)." Harvard Business School Case 213-075, November 2012.

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