Citigroup's Solution: Dilution

By Tom Hutchinson:

In its latest effort to quench an insatiable thirst for more capital to cover past sins and poor judgment, Citigroup (NYSE: C) announced a $4.5 billion common-stock offering.

Originally announced as a $3 billion offering on Tuesday evening, the sale increased by 50% on Wednesday "in response to strong demand from a broad base of investors," according Citigroup CFO Gary Crittenden. I guess nobody asked existing shareholders whether they minded having their shares diluted.

What a motley crew
Citigroup joins other large banks such as Bank of America (NYSE: BAC), Wachovia (NYSE: WB), Merrill Lynch (NYSE: MER) and JPMorgan Chase (NYSE: JPM), all of which have raised capital through security offerings in recent months. This offering follows a $6 billion preferred stock offering last week, bringing the amount of capital raised by the bank in just the last six months to a whopping $40 billion.

The subprime loan crisis has hit Citigroup hard. As the bank has written off obscene amounts of bad debt, it's been forced to raise massive amounts of capital to shore up its dwindling reserves. Less than two weeks ago, Citigroup announced a quarterly loss of $5.1 billion, and roughly $16 billion in writedowns. That was actually an exciting improvement over the prior quarter's $10 billion loss.

Isn't it great to own Citigroup?
Citigroup shareholders have been through hell this past year, and this latest offering further dilutes the value of their already diminished shares. The offering prompted Goldman Sachs (NYSE: GS) to lower earnings estimates on Citigroup stock. Already this past year, the stock has lost more than 50% of its value; it now barely trades above book value. In addition, shareholders have been forced to endure a 41% dividend cut.

Perhaps Citigroup is getting all the bad news over with. Maybe the bank is cleaning out all its dirty laundry now, so it can put this mess behind it and start reporting good news. Somehow, though, I doubt that's the case.

When does the bleeding stop?
According to Oppenheimer analyst Meredith Whitney, the pain's not over yet. Whitney says the bank will need "to raise an additional 10-15 billion...in order to truly shore up its capital position."

In this Fool's opinion, Citigroup will avoid catastrophe, and the stock will bounce back someday. But I don't see that happening for a long, painful time.