Linkfest

Some good items elaborating on topics I’ve discussed in the past week:

Tracking the TARP

The TARP continues to grab headlines, so I thought it would be useful to summarize how the TARP money has been used to date.

As you may recall, the Troubled Asset Relief Program (TARP) created a pool of $700 billion that the Treasury Secretary could use to stabilize the financial sector.  The following chart summarizes the TARP transactions that have already occurred (dark blue) and any additional funds that Treasury has announced for each program (grayish):

Tracking the TARP

As the chart illustrates, Treasury has announced plans for about $645 billion of the TARP money, of which $435 billion has been committed to specific transactions.  But the most interesting facts involve the specific programs:

Continue reading “Tracking the TARP”

The Citigroup Anomaly Lives

Summary: Citigroup securities are still violating the law of one price.

Later this week, Citigroup will finally launch its offer to convert some preferred stock into common stock.  That exchange has big implications for the government, which purchased preferred shares through the TARP program; after the exchange, the government will become Citi’s largest shareholder.

The exchange also has big implications for investors.

As I noted two weeks ago, there have been some anomalies in the pricing of Citigroup securities. Those anomalies have gotten smaller, but they are still with us. Citigroup is still violating the law of one price.

The crux of the pricing anomaly is that there are three different ways to invest in Citigroup’s common stock:

Continue reading “The Citigroup Anomaly Lives”

The Citigroup Anomaly

Something is amiss in the market for Citigroup securities: prices are out-of-whack with standard arbitrage relationships. This suggests that (a) recent financial turmoil — or, perhaps, the policy responses to it — have undermined market efficiency and (b) some investors are over-paying.

Summary: Something is amiss in the market for Citigroup securities: prices are out-of-whack with standard arbitrage relationships.  This suggests that (a) recent financial turmoil — or, perhaps, the policy responses to it — have undermined market efficiency and (b) some investors are over-paying.   

Recent weeks have witnessed yet another case of law-breaking in the financial sector: Citigroup is violating the law of one price.

When the market closed last Friday, there were at least three different ways you could invest in Citigroup’s common stock:

Simple: You could buy common shares of Citigroup, just as you would with any publicly-traded company.

Preferred: You could buy shares of preferred stock that will convert into common shares. Citi has announced, for example, that it intends to convert each share of Series F preferred into about 7.3 shares of common stock.

Synthetic: You could buy and sell options in a way that replicates the financial returns from owning Citi stock.  For example, you could buy a call option with a strike price of $4, sell a put option with the same strike price, and set aside $4 in a bank account.  Taken together, those investments will give you the same financial returns as owning a share of Citigroup common stock. (I am gliding over some small details here.)

In normal times, the law of one price would imply that you should pay nearly identical prices under any of these approaches.  Transaction costs might allow prices to stray a bit from one another, and the preferred might trade at a small discount if the conversion isn’t completely certain.  But any price differences should be small as arbitrageurs buy stock the inexpensive way and sell it the expensive way.

That isn’t the case today. Continue reading “The Citigroup Anomaly”