Wednesday, April 15, 2009

GIC hits the jackpot with Citigroup!

Since I was critical of the original investment, it is only fair now that the investment is actually in positive territory for me to write something. It has been an incredible and wild ride for the people at GIC - losing 70% of the investment then clawing its way back . Luck or skill?...You be the judge!
If you recall, GIC put in $9.8B for convertibles earning 7% per annum[Link] in Jan 2008 - the convertibles can be converted to common stock at US$26.35 per share. One year later Citigroup was teetering at the brink of bankruptcy. The stock price fell to US$2.42 - there were very real fears that the US govt might nationalise Citigroup and wipe out everyone including common shareholders. At $2.42, GIC's conversion price of $26.35 made the convertibles near "worthless" the only consolation was the 7% Citigroup had to pay GIC per annum and that was in the process of being wiped out as Citigroup took TARP money from the US govt and the legislators wanted to banks to stop paying dividends.
In Feb 2009, GIC was given a deal to convert its preferred to common stock at US$3.25 per share - given that the stock was trading at US$2.42 at that point in time it meant that GIC has to take an immediate loss on paper of about 30% which sounds okay because if they didn't convert the preferred wasn't worth much[Link]. Citigroup offered the deal to convert because it will improve their equity base and somehow that help to improve its balance sheet[Link]. So GIC converted 1 preferred to roughly 8 common shares ($26.35 divided by $3.25)...1 to 8 - this ratio will become very important later on in the story.
However, once GIC converted to common, Citigroup shares started to plunge like a rock all the way to US$1. GIC lost 70% of its investment when that happened. Citigroup plunged for 2 reasons - fears of further dilution, fear that it will be overwhelmed by losses as the economy weakened...but the last reason is the most important but not well known until now.
When GIC converted its preferred to common at a ratio of 1 to 8, many arbitragers (people who profit from price difference before and after a conversion) assumed that all preferred can be converted at this ratio. This assumption led them to do this arbitrage trade, that goes something like this:
1. Buy preferred at $14.
2. Short sell the 8 times the amount of Citigroup common at $2. ...collecting $16.
In the process, they made $2. Once they convert their preferred at a ratio of 1 to 8, they can cover the all the common stock they shorted. They did this repeatedly causing Citigroup stock to plunge all the way to $1. Citigroup became the most shorted stock on the NYSE[Link]. It was shorted until there were no stocks left to short. ...then it started to rise on the news that banks were operationally profitable in Jan/Feb 2009. Also, the +ve results from Well Fargo caused it to surge some more in recent days.

The problem for the arbitragers now is the 1 to 8 ratio was never a "black and white" thing - Citigroup never promised that all preferred shareholders that they get to convert at this generous ratio[Link]. If they can't and Citigroup stock keep rising, these arbitragers stand to lose hundreds of millions. So they started to reduce their exposure to this arbitrage trade by reversing it - selling the preferred and buying back the common they shorted. As they buy, the stock goes up...and they panic and buy some more. It is this panic that is driving up Citigroup stock[Link]. Video link on this : [CNBC Citigroup Arb Carnage].
GIC's Citigroup stake is profitable for the past few days after sitting on massive losses for more than a year. Hooray!? However, once this panic is over, there is no telling where it will be 9 months from now. I have to admit this turn of events is a total and complete surprise to me - maybe the geniuses at GIC had it all figured out - WOW!


Anonymous said...

Remember, GIC was investing for the long term and all these gyrations are unimportant.

Anonymous said...

So their million dollar salaries are justified after all?

But I think the most important jackpot is still 50% walkovers, 66%mandate and 98% seats at every election.

Without getting this jackpot first, all other jackpots cannot be achieved, right or not?

Onlooker said...

Oh no, so Ho jinx retire for nothing.

BTW GIC !=Temasek investment.

skeptic said...


Before we get over optimistic, we should be wary that this time things could be different )as you have said). This recent move could be a sucker's rally. It is hard to tell.

For me, I am just ignoring the financial news altogether and just dollar cost averaging.. and looking at the balance sheet (since I am a big fan of value investing). Have been doing so for the past year.

Anonymous said...

As far as I'm concerned, GIC made a very bad investment initially. Any performance appraisal must be done against the initial purchase where the conversion price is $26+.

If not for the US govt intervention, Citi may already be bankrupted, wiping out the entire investment of GIC.

Since Citi has decided to suspend payment of dividends to all shares including preference shares, GIC has little choice but to accept the conversion to common stock at $3+.

Absolutely no credit to GIC.

Anonymous said...

I bought AIG at US$0.35. By your logic, I must be a freaking Einstein!

Think about what you wrote.


Lim Mingji said...

As far as I'm concerned, GIC made a very bad investment initially. Any performance appraisal must be done against the initial purchase where the conversion price is $26+.

If not for the US govt intervention, Citi may already be bankrupted, wiping out the entire investment of GIC.

Since Citi has decided to suspend payment of dividends to all shares including preference shares, GIC has little choice but to accept the conversion to common stock at $3+.

Absolutely no credit to GIC.


Well said, and its the truth. GIC have no choice.

Rialce said...

You never know if maybe SM Goh begged on his knees asking them to release some inside info~~:p

Anonymous said...

Woody bending his wooden knees and his mouth sucking on something begging the Wall St. Warlords?

That's how Woody Goh treated the Lehman Minibond uncles/aunties in Singapore, right?

Anonymous said...

Citi share is still a fraction of the price when GIC went in. That was in Jan 2008. And the price then was around USD26. The price now is USD4.

So the loss is still 85% and Lucky is giving them credit. Surely this is mere typical Lucky's sarcasm.

What has transpired was a case of bananaman LKY wanting to suck up to his daddy US at all costs - even hollowing out this nation and making more Singaporeans beg in the streets if it needs be.

That super bananaman got very little self-confidence if you just look beyond all his swagger.

Azz said...

To above anon:
"So the loss is still 85% and Lucky is giving them credit. Surely this is mere typical Lucky's sarcasm."

Not true. The notes were converted at 8 to 1 for $3.25 so now at $4 p.s. they are making about 20% paper profit.
Yet the fact that they went in at $26 demonstrates that they were totally clueless on how much shit Citibank was in. So no credit to them, just luck. In any case, I guess it is good news since it is "our money" (?), although still too early to tell how this will end.

Anonymous said...

The crux of investing is not whether you gain or lose, as that's part of risk-taking. It is whether you trade within prudential parameters. For an entity which is taking care of national reserves for long term and stable returns, the original rush to buy Citibank, UBS etc in huge sums in the midst of weakening outlook and market turmoil smacked of undue speculative buys which are irresponsible. In the case of Citibank for the time being, it is uncontrollable luck rather than wisdom and our SWFs should take no credit for it. One must also note that the overall positions on the rest of the buys are still very much in the red.

Anonymous said...

Lucky, I don't quite understand what you wrote. You pointed out that GIC preferred shares were converted to ordinary shares at a ratio of 1 to 8. Are you saying that therefore through this conversion the value of GIC holding has increased 8 times?

I mean this is what some readers seems to naively conclude from your article.

But I don't think that is the case.

Look I went to the ST article you cited and it said that GIC was given "an exchange price of US$3.25 (S$5.03) a share, compared with the conversion price of US$26.35 under the original terms of the investment."

That cited US$26.35 price does not seem to be meaningful at a time when Citi share was going at US$2.46.

It never said GIC holdings was converted at 8 times its value. How can this be true at a time when Citi was on the verge of bankruptcy.

Another thing it is also reported in another news article that GIC had not been paid dividend for its preferred shares since its investment.

Lucky please clarify.

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Anonymous said...


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DanielXX said...

Citi is said to be looking at reviewing the terms of their preferred-to-common conversion.

The fact remains that our SWFs were way too early in buying into the banks. Probably our old man was lobbying behind the scenes to get the preferred conversion at a good rate, since he's their global adviser. I think this doesn't absolve whoever made the original decision to invest in late '07 of their investment sins, though. It was completely dumb.

Azz said...

Forget about the 8 to 1 since that seems to confuse some people so let's have simple explanation:

-GIC bought US$ 6.8B worth of preferred shares last year
-Preferred shares then converted into 2.12 B common shares this year

- Share price now 4$ per share so GIC investment now worth about 2.12B x $4 = US$ 8.5B. Paper profit about 20-25%

Pls read:

Anonymous said...

"At the conversion price of US$3.25, GIC will get some 2.12 billion common shares in exchange for its US$6.88 billion in preferred stock. Based on Thursday's closing price of US$2.46 a share, GIC's stake after conversion is worth US$5.21 billion."Wow, based on the above quote as referred by AZZ, this is really fantastic. Frankly who could have thought that US$6.88 Bln that GIC invested was completely untouched by the 80% drop in Citi.

Makes sense? You better believe it ; the article was originally from Business Times owned by who else.

Anonymous said...

It was a misjudgement for GIC to buy bank shares in late '07 given the deteoriating financial climate, why are these people given multi-million salaries for making such dumb decisions, a moron can do the same job !

What if Uncle Sam had not bail out Citi ! What if it was Citi and not Lehman Brothers that they let go ? GIC clearly has no idea what risk managment is !! These GIC morons have paper qualifications but lack real talent for the job !

Azz said...

I also found it hard to believe but the Saudi Prince, GIC, US gov and a few others all got the same great deal. No need to rely on BT, can also check Bloomberg or direct from Citi website.
Rest of shareholders got screwed big time, obviously.

Ghost said...

Sry all but the price u all should be looking at is $26 because that's the price the deal was made at. The conversion price maybe US$3.25 but that's not the price the deal was set at.
One more thing is that this rally will most likely not hold. If this rally does hold, that's mean it will be a U-turn market and that is not very likely

Anonymous said...

Hehe just to add a bit to the confusion, there is another version to the story:

This article LINK worked it out that the GIC 11.1% stake in Citi actually represented a loss of USD5.36 B then:

It (GIC) said its stake in Citi will rise to an estimated 11.1 percent. Based on a Citi market cap of $13.7 billion, this works out to a stake worth $1.52 billion, or a loss of $5.36 billion on its original investment, according to Reuters calculations.Fast forward now. Today the market cap of Citi stands at 22.11B LINK

So if based on the calculation in that article, GIC stake is now worth USD2.45 B, still representing sadly a loss of USD4.43 B.

Where got profit?

Anonymous said...

The state knows how to bluff mah simple as that.

Anonymous said...

PAP constantly spits forth falsehoods and misdirections; if they cannot convince they confuse.

This Citi preferred share conversion is a good example. Instead of making things simple for laymen, its official media speaks in a language that would put the ordinary reader off.

That way, no need to for accountability to the people. So look beyond their figures and so-called facts, just beware that you cannot trust the official version and you must try to analyse if you happen to be good at it, where the contradictions are.

By now we should know better.

Azz said...

I think Google Finance derives the Market Cap from share price x outstanding shares, with number of outstanding shares based on last quarterly report (before all those new shares added). Of course I might be wrong.

Anonymous said...

If Lucky was serious, it more or less describe how he became rich ... accurate name :-)

jeffgoh said...

..what about the $400 million dividends gic had to forego

Anonymous said...

Sarcasm at its best, hahahaha

Parka said...

Let's just say that it's hard to predict these kind of stuff.

Even economists couldn't predict this financial crisis - Businessweek

It's easy to write these articles criticizing.

How about writing one that offers suggestions?

Azz said...

-How about writing one that offers suggestions?-

We already pay some people millions for doing just that. Why should we be doing their job for free while knowing well that they would not give us any credit?

Anonymous said...

I fully agree with Azzz, why are we paying so much obscene dollars to these morons for doing nothing ?

And when Singapore economy falls into a recession, our ministers tell us to wait till US recovers !!? And while waiting these morons still get their million dollar salaries + 8 months bonus !!! This is just day light robbery, and robbing the common Singaporeans.

Anonymous said...


If they are worth every penny of their million dollars salaries they should have bought at least another 20% when citi was worth $1 per share.

I did suggested they buy the whole bank.

Therefore those overpaid bastards should not be accredited for what the bank or the US government had done.

Pathetic Singaporean

Anonymous said...

For those who are interested about citi's creative accounting please read -

escort madrid said...

The writer is totally fair, and there is no question.