December 1, 2008
The Great Citibank Robbery of '08
By Jim Babka

It's been said that, "Taxation is theft." Perhaps then, this is a parable about government bailouts...

The government gave Citibank (CITI) a bailout package of $306 billion -- $20 billion in cash, and the rest in loan guarantees to cover the last 90% of their losses.

The stock itself closed at $3.70 on Friday November 21. One week later, "Black Friday," it closed at $8.29.

And the only thing that changed was the government bailout, which drove up the price of CITI stock.

An individual saw, back in October, the coming decline of CITI. This person bought some put option contracts (betting on the decline). This investor acquired January, $2.50 put contracts.

When an investor buys a put contract, they're betting the stock will go down in value.

When you trade in options you get 100 shares in each put option contract, so each contract went from just shy of $90 as of November 21, to only $14 the day after Thanksgiving -- a $76 decline, or an 85% drop from its high.

Now consider what hadn't changed. CITI's credit card debt is folding. They are the largest holder of credit card debt, and people are defaulting in record numbers. And what earnings do they have? None to speak of. They don't even have a model for building revenue now, save perhaps for hiking checking account fees. They will continue to lose.

Yes, those losses will be almost entirely covered. But why in the wide world of sports would their stock value go up?

Think about this logically. If I offer you a company that can only lose a little bit, but can’t really win, are you eager to "gobble up" that stock during the Thanksgiving holiday? That just doesn’t make sense, does it? 

On the other hand, the put option investment made complete sense. The bailout is proof that the individual in the example above was betting right.

But the house cheated.

So why did this happen? And who benefits? 

Using an analogy... CITI has done the equivalent of defaulting on their mortgage. Their house is in foreclosure. But after the foreclosure hearing, a crooked judge gave them access to the house. They backed a truck up to the door, and they took away a final haul. They’re stripping the house of all the copper pipes, the home security system, appliances, and other accessories, before they allow the bank (now the American people) to take possession.

That means everyone, but the defaulting party, loses. CITI is going nowhere. CITI management gets a final crack at the loot. The taxpayer receives, for their $20 billion, a gutted out shell. And any private investor who saw this coming, gets robbed.

The Bailouts Must Stop! Take action and let your reps in Congress know you oppose these incidents of theft.

Filed under Wealth & Poverty
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