(On the bright side, if the government hadn’t pumped in the money, it would now be worth zero). The company’s tangible book to equity ratio is now more than 50-to-1, and the firm’s gigantic mountain of consumer debt “assets” will almost certainly face enough writedowns in the next several quarters to wipe out the equity that’s left. (Tangible book value excludes intangible assets and excludes preferred stock: It shows how levered the common equity is).
The company could raise new common equity–another $25 billion, say. That would dilute the common stock by half, but that’s better than turning it into a bagel. There would be only one buyer who could come up with $25 billion, though–the U.S. government. And Hank Paulson probably won’t take over Citi unless/until he has to.
The company could try to sell pieces of itself, but this will likely take time. The company could merge with Morgan Stanley or Goldman Sachs, but those firms are sinking fast, too. It could try to sell itself to a massive international bank, but it’s not obvious why this hypothetical international buyer would pay much for the common stock.
Whatever happens, Citigroup won’t declare bankruptcy. Before that happens, Hank Paulson will take it over, just as he did Fannie and Freddie. He will then chop it up and start selling off the pieces to try to recoup some of the $2 trillion that taxpayers will be on the hook for.
Citi’s debtholders will probably be kept whole in that scenario (Hank won’t risk another Lehman). Citi’s preferred shareholders will probably get hit but not vaporized. Citi’s common shareholders, meanwhile, will probably get wiped out.
