Love to hear some feedback.
I think I finally understand how this whole arbitrage thing is going down:
1. C took money from the gov to better capitalize the biz
2. The money was invested by the gov into some preferred issue
3. The issue is convertible to common C
4. Other non-gov investors bought the same preferred knowing there was a particular rate of conversion to common C. But no one seems to be able to say w/ certainty what the rate(s) is.
5. Some of the non-gov investors knew the approx amount of dilution that would take place at the given conversion rate
6. So, those investors saw the chance to lock in a profit by shorting some or all the shares of C that they were going to get from the convertion
7. That created a big big short position in C common
8. Importantly, those investors don't yet have the shares from the conversion because the conversion didn't yet occur but is suppose to on 4-17-2009 (?)
9. Initially, the investors who did the arb had a good deal going but now the stock has substantially climbed in value
10. That means it is costing them more and more to maintain their short position because they may be doing all this through some broker that charges them interest on the amount that they'd owe if they had to buy back the shares. As the price of C goes up, the return on their arb deal goes down. How much? Dunno.
11. At the same time, there is speculation, but only speculation, that the conversion may not happen since the stock is recovering (i.e. investors once again trust the Citi). The financial analysts I hear speak think the conversion will occur.
12. Or that the original term of the conversion could be changed. The analysts I hear speak doubt the terms will change.
13. All the while, the stock climbs on the hope of great earnings w/ GS leading the charge. The climbing price aggrevates those who shorted the stock.
14. Unfortunately, the arb players can't "cover" their short positions until they get their converted shares. Meanwhile their overall arb play loses value so some decide to buy back or cover which in turn starts a short squeeze
15. But there is rumor that the conversion will be delayed past the 17th. That might really aggrevate those in a short position.
16. If earnings are really good, and only if they are really good, AND if the conversion is made less favorable AND/OR if the conversion is delayed: this would likely cause the arb players maximum pain and they'd probably start to bail/cover before all the remaining value of their play is wiped out.
17. There are a few IFs and ANDs in there.
18. Another IF is: what if retail investors start to pile in? If people start to believe, right or wrong, that C was going to recover, be viable, that the economy was going to get better, wow! then we'd see a really big squeeze. But even w/o a squeeze, that scenario would push C a lot higher.
19. What about Pandit wanting to get even? I don't get this part of the story. When he sold the preferred, he got his $$ for C. Of course the stock wnt down, that's what dilution does. So I realy don't see that he has an ax to grind, as in manipulating the conversion; it just doesn't make sense.
20. So, in this moment, I sit on ~10k-ish shares feeling relatively safe through Thursday. But if Friday's earnings aren't really great I'll take a haircut and it's not even summer yet.
21. But what is the true remaining short position?? Wish I knew. Yes, I see the posted links to the sites that show the numbers; too bad they are not real-time.
22. How long can the arb players hold on? Maybe they'll hold past the earnings announcement and redouble their effort and finally break it when all the hullabaloo wears off, but only if retail fails to materialize.
Am I close? Love to hear some feedback.
This was absolutley the best post ever, Cheers to the original posters and to everyone that added to it......
According to Bank of America, the conversion ratio may be adjusted to bring the value of the common stock received in line with the preferred shares’ face value, which is $25.
It's pretty clear what the exchange ratio is going to be for the public preferreds. It's going to result in the issuance of a massive amount of Citi common shares to the pfd. The govt has made billions of dollars (marked to mkt) on its pfd stake in Citi. why would the gov't (which runs Citi) acquiesce to an alteration of the exchange ratio at its own expense? makes no sense. If you think about it logically, there's no reason for Citi/the GOv't to change the pfd exchange ratio from what it says in the preliminary S4.