If you own Citigroup ( C) shares, you're a chump. It's not your fault, mind you. You've been played by Citi. And no one is calling them on it -- the SEC and the NYSE are playing along, in fact. You've been had. Citigroup is playing fast and loose with its shares and stockholders get no say in the matter. It's all spelled out in the bank's press release today stating that it plans to dilute the holdings of common stock holders by converting preferred shares into common shares, and then it will conduct a reverse stock split to reduce the total number of outstanding common shares. Now here's the part of the press release that makes you a chump: "Shareholder approval to increase Citi`s authorized shares is not necessary." Citi goes on to say that the NYSE granted an exception to shareholder voting requirements. The plans are on file with the SEC, and Citi's release suggests it doesn't anticipate any problems proceeding. The plan to get the government and other owners of preferred shares to convert to common shares will first dilute the holdings of investors who currently own common shares. Don't like that? Too bad. Then comes a reverse stock split that will convert some number of shares into a single share with the same relative value as the combined shares previously held. Of course that assumes the shares hold onto that value. Do you feel lucky? It's not just common shareholders that are getting played here. Citi also is cleverly pushing its bailout repayment risk onto the government with these initiatives. If it all goes through, taxpayers will have to hope for a major rebound in the bank's share price in order to recoup the "investment" the U.S. Treasury made.
For Citi, though, it might actually be better if the share price doesn't rebound quickly. If the price drops after the reverse stock split, the bank would be able to launch a buyback and get more shares for less money. Ultimately, the government could be repaid for pennies on the dollar. This is a great model for all of the other financial institutions that "sold" preferred shares to the government. That's a long list. In addition to the $40 billion in preferred shares of Citi held by the government, other big government holdings include: $45 billion of preferred shares in Bank of America ( BAC); $25 billion worth of preferred shares in Wells Fargo ( WFC); $25 billion in preferred shares of JPMorgan Chase ( JPM); $10 billion of preferred shares of Goldman Sachs ( GS); and $10 billion of preferred shares of Morgan Stanley ( MS). All told, the Treasury's list of preferred share holdings is nine pages long and totals $198.5 billion. AIG ( AIG) is listed separately under the heading of "Systemically Significant Failing Institutions" with $40 billion of preferred shares. Why not convert all those preferred shares into common shares and let the market decide how much taxpayers get repaid? Heck, taxpayers might stand a better chance of seeing some money return to the Treasury. As for common shareholders, well, too bad. Citi clearly demonstrated no one cares what you think.