BuffaloBill Posted May 7, 2009 Share Posted May 7, 2009 As an example, the taxpayers of the US now own about 34% of Citibank (or will when the full conversion of preferred shares is finalized). How does the government decide when to divest these holdings and how do they do so without creating dynamics that impact the entire market? Soros calls this "reflexivity." Essentially Soros argues that in some situations the market is influenced by market makers in such a way that fair trade or equilibrium is not present because of the very actions of a market maker serve to throw the market off of it "natural course." Point is that the US Gov't is clearly a market influencer simply because any action it takes to unravel its now vast holdings of Citi, AIG and others impacts the market overall. I wonder how this plays out. Do any of you have thoughts? I am curious both as a taxpayer and an investor. Link to comment Share on other sites More sharing options...
DC Tom Posted May 8, 2009 Share Posted May 8, 2009 As an example, the taxpayers of the US now own about 34% of Citibank (or will when the full conversion of preferred shares is finalized). How does the government decide when to divest these holdings and how do they do so without creating dynamics that impact the entire market? Soros calls this "reflexivity." Essentially Soros argues that in some situations the market is influenced by market makers in such a way that fair trade or equilibrium is not present because of the very actions of a market maker serve to throw the market off of it "natural course." Point is that the US Gov't is clearly a market influencer simply because any action it takes to unravel its now vast holdings of Citi, AIG and others impacts the market overall. I wonder how this plays out. Do any of you have thoughts? I am curious both as a taxpayer and an investor. In AIG's case (which is a bad example, but the only one with which I'm familiar with the structure of the government's ownership), the government holds 80% of the company, but in a private placing of preferred stock that is not ikely to be sold on the open market. If it is, it's not likely to be sold as common (it could be converted to common...I just doubt it would be), which would mean that the shares of common would not likely be unduly influenced, as the government's equity ownership is already reflected in the share price. I imagine that most other "government ownership" deals are structured similarly. However, note the number of times I used "not likely". Because I really don't know. There's lots of ways the government could divest themselves of ownership, all with different potential effects, and all dependent to a degree on the prevailing market psychology at the time. As a rule of thumb, I'd think that unless the government is holding common stock, the government's share is already reflected in the common stock price. I'd feel safe trading based on that rule of thumb, but wouldn't be at all surprised if it turned out to be wrong in many cases. Link to comment Share on other sites More sharing options...
finknottle Posted May 8, 2009 Share Posted May 8, 2009 Easy. Once the government owns stock in a company, it will have to have people whose job is is to manage the program. Middle management will find reasons for upper management never to divest - protecting existing programs is something the workforce is good at. What of this big finger forever stuck in the shareholder pie? It's pretty clear that the government will be an activist investor. That can only end with their looking and acting like state companies. The government won't let them go bankrupt, but it will sure speed them along the road to irrelevancy. So in short, the government will divest without disrupting the market by slowly and ultimately making the holdings worthless. Link to comment Share on other sites More sharing options...
Fingon Posted May 8, 2009 Share Posted May 8, 2009 How is the government supposed to fairly regulate the market, if they own a part of it? Link to comment Share on other sites More sharing options...
BuffaloBill Posted May 8, 2009 Author Share Posted May 8, 2009 In AIG's case (which is a bad example, but the only one with which I'm familiar with the structure of the government's ownership), the government holds 80% of the company, but in a private placing of preferred stock that is not ikely to be sold on the open market. If it is, it's not likely to be sold as common (it could be converted to common...I just doubt it would be), which would mean that the shares of common would not likely be unduly influenced, as the government's equity ownership is already reflected in the share price. I imagine that most other "government ownership" deals are structured similarly. However, note the number of times I used "not likely". Because I really don't know. There's lots of ways the government could divest themselves of ownership, all with different potential effects, and all dependent to a degree on the prevailing market psychology at the time. As a rule of thumb, I'd think that unless the government is holding common stock, the government's share is already reflected in the common stock price. I'd feel safe trading based on that rule of thumb, but wouldn't be at all surprised if it turned out to be wrong in many cases. The preferred shares they hold in Citi are being converted to common. The same is going to happen with BAC. Supposedly Citi shares have already taken the dilution into account. Link to comment Share on other sites More sharing options...
TPS Posted May 8, 2009 Share Posted May 8, 2009 The preferred shares they hold in Citi are being converted to common. The same is going to happen with BAC. Supposedly Citi shares have already taken the dilution into account. Seems pretty simple since there's no hurry to unload the share. There are several options. Wait for Citi to recover (and the market in general), then a gradual sell off. Or, sell significant "chunks" of stock to large institutional investors (probably Goldman depending on who the T-Sec is...) at an agreed upon price--just like IPO, who then holds and sells off in a similar way. It's not like there's no precedent here. Link to comment Share on other sites More sharing options...
bills_fan Posted May 8, 2009 Share Posted May 8, 2009 Simple, unload it in Dark Pools. http://en.wikipedia.org/wiki/Dark_pools_of_liquidity http://en.wikipedia.org/wiki/Dark_liquidity Link to comment Share on other sites More sharing options...
BuffaloBill Posted May 8, 2009 Author Share Posted May 8, 2009 It's not like there's no precedent here. I assume you meant the double negative to suggest there is a precedent... If so, what is it? The government bailout of Chysler was in the form of a loan. Arguably holding preferred shares is akin to holding a loan. Holding common shares is a whole new ballgame. Link to comment Share on other sites More sharing options...
TPS Posted May 8, 2009 Share Posted May 8, 2009 Simple, unload it in Dark Pools. http://en.wikipedia.org/wiki/Dark_pools_of_liquidity http://en.wikipedia.org/wiki/Dark_liquidity Dude, It's investment banking 101. The government works with a group of financial institutions and agrees to sell at a specific price. The institutions then take the risk of selling the shares over whatever time horizon makes them the most money. I don't think they are racist either; they will sell to dark pools or light pools of liquidity. Link to comment Share on other sites More sharing options...
bills_fan Posted May 8, 2009 Share Posted May 8, 2009 Dude, It's investment banking 101. The government works with a group of financial institutions and agrees to sell at a specific price. The institutions then take the risk of selling the shares over whatever time horizon makes them the most money. I don't think they are racist either; they will sell to dark pools or light pools of liquidity. Or the gov't contracts with an advisor to get the gov't the best price and the advisor sells on behalf of the gov't taking a % of the sale as a fee. In that case, the only way to sell that kind of block is via a dark pool. And no, there is no rascism or light pools. The "dark" only means you can't see price, volume or counetrparty until you have already agreed on the price and volume; without knowing the counterparty. Spend much time on the Street...dude? Link to comment Share on other sites More sharing options...
TPS Posted May 8, 2009 Share Posted May 8, 2009 Or the gov't contracts with an advisor to get the gov't the best price and the advisor sells on behalf of the gov't taking a % of the sale as a fee. In that case, the only way to sell that kind of block is via a dark pool. And no, there is no rascism or light pools. The "dark" only means you can't see price, volume or counetrparty until you have already agreed on the price and volume; without knowing the counterparty. Spend much time on the Street...dude? The market has a "natural course"? The market has an equilibrium? Do you think markets are efficient? Sorry, I just don't think it's that big of a deal. I guess I am disagreeing with you, although you really haven't stated your thoughts specifically. There is no reason to unload all of the shares at once, and I am sure the government won't. On the other hand, if your point is that the government can give someone or some institution a windfall, that's quite possible--the government has been doing that for along time... G'night. Link to comment Share on other sites More sharing options...
BuffaloBill Posted May 8, 2009 Author Share Posted May 8, 2009 The market has a "natural course"? The market has an equilibrium? Do you think markets are efficient? Sorry, I just don't think it's that big of a deal. I guess I am disagreeing with you, although you really haven't stated your thoughts specifically. There is no reason to unload all of the shares at once, and I am sure the government won't. On the other hand, if your point is that the government can give someone or some institution a windfall, that's quite possible--the government has been doing that for along time... G'night. My thoughts are simply how does a body that has the responsibility for regulating markets also participate and influence them as an investor? The point that Soros makes is that in some situations a participant in the market, in this case the government, can influence the market to its advantage. While not a likely scenario the government as a 34% owner in Citi could for example take short positions on Citi and influence the fall of Citi stock by dumping it to play into peoples’ fears. Conversely, they can enhance the value of their holdings by creating legislation that is favorable to Citi. Extreme examples for point of illustration but are they? Link to comment Share on other sites More sharing options...
GG Posted May 8, 2009 Share Posted May 8, 2009 My thoughts are simply how does a body that has the responsibility for regulating markets also participate and influence them as an investor? The point that Soros makes is that in some situations a participant in the market, in this case the government, can influence the market to its advantage. While not a likely scenario the government as a 34% owner in Citi could for example take short positions on Citi and influence the fall of Citi stock by dumping it to play into peoples’ fears. Conversely, they can enhance the value of their holdings by creating legislation that is favorable to Citi. Extreme examples for point of illustration but are they? That's a fairly draconian example, and highly illegal if it were done by a private party. I think people are arguing two things, the valuation and execution, which are different things. As Tom said, the markets have already factored in the government ownership and high probability of bankruptcies, that's why AIG is trading between $1 & $2. When the time comes for the gov't to unload the stock, then it can follow any number of ways, either through a direct secondary offering to the market, or use tools such as bills_fan suggests. As for the markets being efficient, it's a specious argument in this case, because you're valuing a very widely held individual company with very public metrics. It should be pretty easy to conduct an analysis of the company's earnings potential vs its liabilities and come up with an equity value of $0. Link to comment Share on other sites More sharing options...
BuffaloBill Posted May 10, 2009 Author Share Posted May 10, 2009 As for the markets being efficient, it's a specious argument in this case, because you're valuing a very widely held individual company with very public metrics. It should be pretty easy to conduct an analysis of the company's earnings potential vs its liabilities and come up with an equity value of $0. At the risk of belaboring a point the government has the responsibility of overseeing the very companies they now own. No citizen or stockholder can make this claim. In the end it likely will not matter because as is often the case with government bodies the left hand will act counter to the well being of the right hand. As an investor I hope to continue to make money because of this. As a taxpayer, it makes me sick. Link to comment Share on other sites More sharing options...
DC Tom Posted May 10, 2009 Share Posted May 10, 2009 At the risk of belaboring a point the government has the responsibility of overseeing the very companies they now own. Tell that to the people at AIG. Link to comment Share on other sites More sharing options...
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