Citigroup's Exchange Offer (C)

Robin  Greenwood; James  Quinn

Supplement | HBS Case Collection | September 2009 (Revised June 2011)

Citigroup's Exchange Offer (C)

Abstract

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 case, 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 Instruments; Financial Services Industry;

Format: Print

2 pages

Purchase

Citation:

Greenwood, Robin, and James Quinn. "Citigroup's Exchange Offer (C)." Harvard Business School Supplement 210-015, September 2009. (Revised June 2011.)

On the afternoon of Monday October 13, 2008, Hank Paulson Jr., the Secretary of the Treasury of the United States, walked into the large conference room across the hall from his office in the Treasury Department. Joining him were Federal Reserve Chairman Ben Bernanke, President of the Federal Reserve Bank of New York Timothy Geithner, Chair of the Federal Deposit Insurance Corporate Sheila Bair, and the Chief Executive Officers of nine of the largest banks in the United States. This distinguished group had been brought together by the most serious financial crisis since the Great Depression of the 1930s. Financial panic was pushing the U.S. and European financial systems to the brink of failure. Paulson hoped his meeting with the bank CEOs would be a turning point. U.S. financial markets were closed for Columbus Day, and Paulson was planning to announce the latest government actions to stabilize the financial system before markets reopened on Tuesday.

In February and March 2009, the U.S. economy was in the midst of a terrifying financial and economic crisis. Between the beginning of 2008 and early 2009, four of the 25 largest U.S. financial institutions had failed, and nine of these 25 institutions had taken extraordinary steps to avoid failure—either receiving one-off government support, merging with another firm, or submitting to heightened regulation to qualify for future government support. Led by Treasury Secretary Timothy Geithner, the government had to quickly devise policies to stabilize the financial system and the economy. The case explores the details of policies, and the decision making process that led to them, that Geithner and his team devised under immense time pressure to stabilize the system. The case features an extended discussion of Geithner’s innovative “stress test,” which would reveal the longer-term health of the country’s largest banks.

We evaluate Eugene Fama's claim that stock prices do not exhibit price bubbles. Based on U.S. industry returns 1926–2014 and international sector returns 1985–2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up, can all help forecast an eventual crash and future returns; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in U.S. and international samples.

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Citigroup's Exchange Offer (C)

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