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As I watched CitiGroup (C) swing in the wind yesterday, yet another financial shorted down to a fraction of its book value, with the usual discussions - the market knows something, no-one will do business with them, rumors about the assets - I came with an idea which I think would solve this type of problem.
The problem is, when a company is under short-selling attack, their hands are tied as far as defending themselves. There are definite rules, aimed at preventing companies from manipulating their share prices, which limit the amount and price of buybacks a company can do. To be protected against allegations of manipulation, they can't trade more than a certain percentage of the day's volume, I think its 25%, and they can't buy above the last trade.
CitiGroup at 3.77 is now trading at a fraction of tangible book value per share, which is about 9. GAAP Book value is around 18. As pundits pointed out yesterday, the company's market cap at 20 billion was less than their TARP infusion of 25 billion. We know they have the funds, why not buy back as many shares as possible? Some would complain on behalf of taxpayers, that the use of TARP funds was inappropriate. But I would answer, Tresaury holds warrants - if the value of shares is increased, the value of the warrants is increased.
My suggestion: when a company's shares trade below book value, it enhances shareholder value to buy back the shares. So, once the stock gets below book, management should be given carte blanche to buy as much stock as cash resources permit. Current legislation should be changed to provide a Safe Harbor exception of this type.
MBIA (MBI), whose shares closed Friday at 4.24, which is .36 of book, would be a case in point. The company has approximately 293 million left on its buyback authorization: at Friday's close they could buy back 69 million shares, approximately 25% of the total 273 million that have been issued. That would increase management's best estimate of the total economic value of each share from 37.55 to approximately 50.00, well worth doing.
If management's hands were not tied by law, they could make a quick end of the problem of aggressive short-selling, by buying up the entire short interest. In MBIA's case, there are quite a few large holders such as Warburg Pincus and Third Avenue, leaving a limited amount of shares available for short-sellers to cover with. A wonderful short squeeze, like the one on VW, could be created.
Hartford Insurance Group (HIG) would be another case where the legal permission to conduct aggressive buybacks would be appropriate. Even Allstate (ALL) is trading at half its book value.
Again, the rule would be, once shares trade under book value, the company can do buybacks freely and unannounced, as many shares as the market offers for sale on a given day.
This type of short-selling is basically a down in the gutter brawl: the problem is, management is playing by Marquis of Queensbury rules while their adversaries are kicking them below the belt and gouging their eyes out. Why not change the rules so company management can defend the interests of shareholders? We could give company management access to the same financial weapons of mass desturction used by the short-sellers.
Many expect that by Monday CitiGroup will have been disposed of by another of these week-end marathons, with the shareholders wiped out. It would be better to let the company defend itself than to ratify the damage done by short-sellers and rumormongers in a fear-crazed market.
As a matter of fact, I think it would be legally correct for a company to assert the self-evident fact that they are creating share value as a defense against any and all charges of manipulation in a case of this type. A company like CItiGroup, when under attack, should simply buy as many shares as possible. If taken to court, the defense is simple: it is self-evident that management was acting in the interests of shareholders - the shares were trading at less than the value of the assets. Res ipsa loquitur.
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