How come common shares of Citi go down and Preferred shares go up?

[Joanne98]

And UP by a lot.

C-PI CITIGROUP INC PFD 17.91 11:12AM ET 7.37 (69.92%) 16,115,746 Chart, , More
C-PP CITIGROUP PFD SER AA 8.82 11:12AM ET 3.34 (60.97%) 15,509,678 Chart, , More
C-PW CITIGROUP INC. 6.45% 9.80 11:12AM ET 2.65 (37.06%) 1,087,874 Chart, , More

http://finance.yahoo.com/gainers?e=us

Common down 32%

http://finance.yahoo.com/q?s=C

[John Q. Citizen]

1. That is a good question. It would seem that "prefered" is seen as more valuable

and common is less valuable.

So I wonder what that means in real life?

[Joanne98]

4. But the treasury is converting 25 billion of preferred to common.

WASHINGTON -(Dow Jones)- The U.S. Treasury Department announced Friday that it is willing to convert up to $25 billion of its preferred stock holdings in Citigroup Inc.(C) to common stock in a move that would give the government a 36 percent share of the giant bank.

Still, Treasury made clear that the government will convert its stake only if Citigroup can attract private investors to do so as well.

http://money.cnn.com/news/newsfeeds/articles/djf500/200902270804DOWJONESDJONLINE000669_FORTUNE5.htm

You would think it'd be the opposite

[JohnWxy]

16. this would dilute each common share holders equity share thus reducing the value of the common share

[Donnachaidh]

2. Isn't the Government taking *common* shares instead of preferred on this latest

bailout?

I dunno, maybe some Citi investors trying to make even more money on the side? It's only the US taxpayer getting reamed a bit more for their *bailout*.

[JohnWxy]

3. if the bank goes into default and liquidation Preferred share holders will recover their investment

before common share holders, who come last and may get nothing. Preferred share holders are not completely safe but they are in a much better position compared to common shareholders if liquidation becomes necessary.

[Joanne98]

5. But why did the preferred go up so much today. Are investors converting

their shares from common to preferred? Or is it new buyers.

[marketcrazy1]

9. edit

edit

[girl gone mad]

14. The risk premium dropped.

The risk premium on 5 year notes dropped about 180 basis pts. (~15%).

From the Wall Street Journal:

The annual cost of protecting Citi's senior bonds against default for five years - a key gauge of creditworthiness - dropped by $25,000 to $370,000, according to broker Phoenix Partners Group. The cost was as low as $360,000 earlier Friday.

The annual cost of protecting the riskier subordinated debt slipped by about $ 129,000 since Thursday to about $610,000, to data from Phoenix Partners Group and Markit. The costs had on Tuesday reached levels usually seen for distressed companies before falling, albeit to still-elevated levels.

[JohnWxy]

15. probably a bit of both.

[Joanne98]

6. Look at the spike in volume on C-PI

http://finance.yahoo.com/q/ta?s=C-PI&t=5d&l=on&z=m&q=l&p=&a=&c=

[Joanne98]

7. I wonder if the Treasury did the same thing with another bank if the preferred

shares would jump like this again.

[TechBear_Seattle]

8. Simple supply and demand

The supply of common stock has greatly increased, diluting the market value and driving down the price. The supply of preferred stock has greatly decreased, condensing the market value and driving the price up.

[Joanne98]

11. OH I get it kinda like a stock split. Making less preferred and more common.

But what about the volume?

http://finance.yahoo.com/q/ta?s=C-PI&t=5d&l=on&z=m&q=l&p=&a=&c=

Is this spike in volume all the treasury. Or were they buyers who knew it would go up?

[TechBear_Seattle]

12. Stock splits are neutral events

When a stock splits, there is a corresponding split in value. For example:

XYZ Corp. has one million shares of common stock with a market value of $100 per share. The total value of the common stock is $100 million. Their stock splits 2 for 1. There are now two million shares of common stock with a market value of $50 per share. The total value of the common stock is still $100 million. The benefit of a stock split is that it is easier for investors to buy a $50 share than it is to buy a $100 share, which gives the stock room to continue inflating in value.

You will also see "reverse splits," where stocks are consolidated. XYZ Corp suffers because there is decreased demand for their products in these bad times, and the value of the stock falls to $10 a share. With two million shares, the total value of their common stock is $20 million. They do a reverse split 1 for two. There are now one million shares of common stock with a market value of $20 a share, and the total value of their common stock remains at $20 million.

I would expect that the increase in volume is both the exchange of preferred for common, and the result of the change in availability. Even if people are buying the common stock, if the supply increases faster than demand, the value will fall; that is economics 050. But it is hard to tell, as conversions on this scale are rare and are almost never as public as this one.

[Joanne98]

13. Thanks Techbear! That helped alot.

:hi:

[notesdev]

18. The volume was after the conversion deal was announced

That was the market's reaction to the deal, it bought preferred heavily as a result. In political terms - and let's face it, today's market is largely driven by politics - they get paid before even the government does... not a terrible position to be in.

[Joanne98]

10. BOA common is selling off but so is it's preferred

http://finance.yahoo.com/q?s=BAC-PH

[notesdev]

17. Supply and demand

from finance.yahoo.com

"Citigroup said before the opening bell that it agreed to a deal in which the U.S. government and private investors including the government of Singapore and Saudi Arabian Prince Alwaleed Bin Talal will convert their preferred stock in the struggling bank to common shares. The plan won't require additional money from the U.S. government, which holds an 8 percent stake in Citigroup and would own 36 percent."

The number of preferred shares just went down by a lot, and the number of common shares just went up by a lot. If you held preferred shares before the move, you now hold a bigger slice of the preferred share pie than you did before; vice versa for common shares.