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From: Saulamanca	3/18/2009 12:33:48 PM
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Heavy Short Covering Boosts Citi Shares By ANDREW BARY WEDNESDAY, MARCH 18, 2009 Shorts-sellers are apparently buying back Citigroup shares en masse today in advance of an upcoming preferred-for-common stock exchange. CITIGROUP (ticker: C) SHARES WERE UP 25% today in late-morning trading amid a big short squeeze in the stock tied in part to an upcoming massive exchange offer for the company's preferred stock that will result in a huge increase in the number of Citi shares outstanding. Citi shares, which were recently trading at $3.14 a share, now have more than tripled from a low of $1 reached on March 5. Arbitragers say that Citi shares are virtually impossible to short now because of heavy demand from those who had set up an arbitrage in which they bought Citi preferred and shorted the stock after the banking giant announced the exchange offer on Feb. 27. Traders say that Citi shares could fall once the exchange offer is complete, which is expected in about a month. That's because of the dilution created by the additional common shares. Citi is expected to file information on the exchange offer with the Securities and Exchange Commission in the next few days. In a bid to boost its depleted tangible common equity, Citi announced an exchange offer involving some $25 billion of preferred held by the government under the TARP program, some $12.5 billion of preferred held by a group of private investors, including Saudi Prince Alaweed, and $14.9 billion of publicly held preferred. Citi shares fell sharply in the wake of that announcement, dropping to under $1 from $2.50 as investors banked on massive dilution of existing common holders. Citi's shares outstanding are expected to rise to about 22 billion from 5.5 billion once the roughly $52 billion of preferred is converted into common shares. The preferred exchange offer is voluntary but the vast majority of public holders are expected to participate. The Treasury Department also is planning to participate. Arbs who initially bought Citi preferred and shorted Citi common banking on earning a roughly 10% spread until the deal closed now are facing huge losses with one arb calling the situation "a death march." Citi's actively traded series P preferred now trades around $13.50, way below the exchange value of the preferred of about $20. Holders of the series P preferred will get 7.31 shares of Citi common for each preferred share, which has a face value of $25.... online.barrons.com

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