“On why yield – you can short the common to hedge off the risk.

You now have all your cash back and are delta neutral, but they have to pay you the coupon!”

However, if you are short the stock, don’t you have to pay the dividend? 7% yield on Citi currently.

Thanks for the detail and the commentary. “Nixonian proportions” indeed.

Actually, it was a non-denial denial of Nixonian proportions:

Ms. Pretto said in the statement that “any reports on specific numbers [of layoffs] are not factual.”

Got that? Not factual. So if the job cuts come in at 44,999 they can honestly argue that the 45,000 figure was “not factual.” That’s why they pay the PR guys the big bucks.

Actually, my other pet theory about the layoff leak is that it was specifically designed to prep the ground for the Abu Dhabi deal (Abu Dhabi Doo!) — to try to keep it from becoming another fiasco like the Dubai ports deal.

If so, then the next message leaked out of C should be that the massive layoffs won’t be necessary after all — as long as the deal goes through quickly.

The message to the Arabphobes: Make a move and the 45,000 employees (many of them residents of Greater New York)get it.

Somewhat like the scene from Blazing Saddles, except with a tall white guy wearing an expensive Italian suit.

You have that right. CNBC reported that Citi will cut 45,000 jobs. I believe Citi issued a denial, which means it might take them a quarter or two to figure out how to get rid of that many people.

To quote the immortal Hunter S. Thompson, Citi these days sounds like a farmer with terminal cancer trying to borrow against next year’s crop. So what kind of rate would you expect it to get?

The trick now, I guess, will be to cut the jobs to free up the cash flow to cover the vig.

It’s not a dumb question at all. In the last ten+ years there has been a pronounced bias towards valuing stocks based on appreciation potential rather than dividends and dividend growth. Yet the traditional way of valuing stocks was a dividend discount model.

The more immediate answer is that appreciation is a less certain source of return than dividends. And while dividends can be cut, a preferred dividend is given preference over common, so it would not be cut if at all possible.

I see considerable downside risk in the stock market generally and Citi in particular. Tony Jackson in today’s Financial Times drew parallels between our stock market and that of 1973. Stock averages fell 70% in the following 2-3 years and did not return to 1973 levels for more than a decade. And that was with a period of high inflation in between, so it took longer to regain 1973 prices on a real basis. In inflationary times, you want to accelerate the receipt of cash, since cash now is worth considerably more than cash later. While all stocks suffer when inflation increases, growth stocks are affected more than high dividend stocks.

I expect Citi to underperform, but a minority thinks it is a buy. I believe they will be found to have even more losses. Even with the investment, I think they could still be seen as being undercapitalized, even fragile.

You now have all your cash back and are delta neutral, but they have to pay you the coupon!

This is a zero-risk trade for the guy writing the check. Nice deal eh?

(Yeah, yeah, I know there are usually supposed prohibitions against this. Yeah, ok. And these investment pools have no affiliates who can do the other side of it, right? Pull the other one.)

If the company goes boom, you lose nothing (your convert is worthless but the short profit offsets it; no change) while if the stock rises your short goes the wrong way but the convert appreciates – again, no net change.

Basically, its a way to park $8 billion and get paid 11% on it, risk free.

Now tell me where you find that sort of deal – other than from someone who REALLY needs the money!

The CFC deal at 7% was Guido financing. This deal is Guido-squared.

I guess its fitting, given all the CDO-squareds that these clowns (plural, not just “C”) have been putting out over the last few years…..