The U.S. Government Is The New Ax In Citigroup (C) Shares

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Tonight, Citigroup (NYSE: C) is completing its previously announced preferred-for-common share exchange. While the exchange news is a huge dilutive event for the shareholders, what is maybe more important is that this will be the government's first common stock ownership of any publicly traded company.

Yes, the U.S. has its hands in a number of public and private companies, like AIG (NYSE: AIG), Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), General Motors and Chrysler, among others, but the government's interest in those companies are held in debt, preferred shares, convertible preferred shares and warrants - not common stock.

By owning common stock, the government can act like a regular Joe investor. If it want to sell some, they can - LIQUIDITY. Liquidity has always been the beauty of the U.S. stock market, which mostly occurs through the buying and selling of common shares. Now the U.S. government has liquidity in its shares of Citigroup. A lot of it. In fact, the government's common share position in Citigroup is worth about $36.3 billion based on the current share price.

With the Citigroup exchange, about 17.4 billion new shares are being issued, bringing the total shares of Citigroup outstanding to about 22.9 billion --- up from the 5.5 billion shares outstanding currently. The U.S. government's portion of the new shares is about 7.7 billion shares, or 33.6% of the total outstanding shares.

The new shares have no restrictions and can be immediately sold.

So what will the U.S. government do with their new "liquidity" in Citigroup shares? The general thought is that the U.S. government will be a medium-to-long term holder of the shares. While this may be true, the government is not saying.

It is also unclear how the government will be disclosing their stake. A normal holder of this large of a percentage of the common stock has to file a 13D with the SEC. This filing shows certain intentions of the holder and also discloses recent transactions in the shares. We have contacted Treasury about how they will update their holdings of Citigroup, but they have not given us an answer on this.

There were are also a lot of other things we asked Treasury but have yet to get any answers on. Some of those questions included:
- Who is handling the shares? (Treasury or outside firm)
- Can the shares be borrowed against?
- Is the position being hedged?

Answers to these questions are not only "must knows" for Citigroup, but the public should know how future U.S government common share ownership in others companies will be handled.