Citigroup's Stock Snafu Caps Off Embarrassing Week

A poorly calculated stock offering prompts the U.S. to delay selling its 34% stake

Citigroup started off this week on the right foot, trumpeting its plan to pay back $20 billion and wriggle out from under the government's thumb. But as the Wire covered here, public reception was chilly even before analysts discovered Citi would be reaping a $38 billion tax abatement for its troubles. Now Citi's hope to raise the cash through a stock offering has faltered, as tepid investors balked, driving the price down and prompting the government to back away from a sale of its 34% stake.

By waiting for the price to rise, is Washington making a classic investing error, or is it wise given Citi's poor prediction of the market's appetite? Either way, the weak showing has turned the bank's hoped-for week of triumph into a walk of shame.

• A Textbook Case of 'Loss Aversion,' writes Jon Hilsenrath in the Wall Street Journal. He argues that the government is balking for irrational or emotional reasons, much like individuals refuse to cut their losses even when it would be beneficial. He asks, "What will the government do in March if the shares have fallen even further?"

• Institutional Investors Are Lukewarm, says Andrew Bary in Barron's. He lays out Citi's challenge in raising the money, noting that it will "dilute Citi shareholders" and that big investors have reasons to be skeptical: "There's also more uncertainty about Citi's outlook than those of its peers ... One institutional investor says Citi clearly is willing to accept significant dilution to rid itself of significant government involvement and to loosen pay restrictions on top employees. This investor also says that Citi's management unfortunately is following other banks to market, which puts pressure on Citi to offer a lower price on the equity offering."

• Citi Got Greedy, the Government Miscalculated, writes Jesse at Jesse's Café Américan. "The shareholders of Citigroup should be furious at the greedy and reckless actions of Citi's management in diluting their shares in order to obtain a freer hand in granting themselves fat bonuses...And the de facto largest shareholders of Citigroup, the US taxpaying public and all holders of US Federal Reserve Notes, took quite a paper loss on their holdings because of Tim [Geithner] and [Larry Summers's] miscalculations regarding the market's willingness to swallow more large chunks of questionable debt riddled equity from the US zombie banks."

• Citi Overestimated Demand for Its Stock, says Felix Salmon at Reuters. "At least now it's a bit more obvious why Vikram Pandit couldn't make his scheduled meeting with the president on Monday: he really was desperately trying to drum up interest in this share sale. Obviously he and his capital markets team didn't do a particularly good job...I suspect that the real problem here was that Citi's bankers started believing their own share price, thinking that there was much more fundamental demand for ownership of this behemoth than actually there is."