Losers double down.

That’s the classic trading rule which the USA is about to violate in an enormous way. According to trading maven Dennis Gartman, one should “never, ever, ever, under any circumstance, add to a losing position.”

And yet that is what we are about to do.

To review: Former Treasury Secretary Hank Paulson made a terrible investment on behalf of the taxpayers by purchasing a 7.8% stake in Citigroup (C) for an initial $25 billion dollars. He further put the US on the hook by guaranteeing against 90% of future losses on $301 billion in assets. Subsequently, we (the taxpayers) injected another $20 billion dollars.

At the time, Citigroup had a market cap of about ~$50 billion dollars. Today, its worth ~$13 billion.

So for about 100% of the market value of Citi, plus insurance guarantees worth of as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment.

Pretty good deal, eh?

That $45 billion dollar stake now has a market value of just over a billion.

And, its about to get even worse.

Rather than do what is the FDIC-mandated-by-law thing, we will instead convert the nearly worthless common into preferred shares. The taxpayers stake will rise to near 40% of Citigroup.

NYT:

“Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock. It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.”

What does this do for us? Well, the higher investment stake creates an enormous incentive for John Q. Public to continue to pour money into Citi, regardless of valuation. The inept banking giant then has access to infinite amount of capital, courtesy of you, the 1040 filers.

Its just another example of why these insolvent banks should be nationalized, or for you squeemish free marketers, FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

If Obama continues to listen to the god-awful advice of Larry Summers and Tim Geithner, he will doom his presidency, and finsh marginally ahead of George W. Bush on the list of worst presidents.

This is not change we an believe in . . .

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UPDATE: February 27, 209 7:41am

Its a done deal Treasury Announces Participation in Citigroup’s Exchange Offering

http://www.ustreas.gov/press/releases/tg41.htm

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Previously:

The New N Word: Nationalization (February 25th, 2009)

http://www.ritholtz.com/blog/2009/02/nationalization-the-new-n-word/

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING (December 3rd, 2006)

http://www.ritholtz.com/blog/2006/12/dennis-gartmans-not-so-simple-rules-of-trading/

Sources:

U.S. Is Said to Agree to Raise Stake in Citigroup

ERIC DASH

NYT February 27, 2009

http://www.nytimes.com/2009/02/27/business/27deal.html

Citigroup to Be Asked by U.S. to Get Private Capital

Bradley Keoun and Rebecca Christie

Bloomberg, Feb. 27 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHfixhywTZBQ&