Citi: looking for as much as a 40% stake from the government

This news is just in from the Wall Street Journal. Obviously, all of the activity we have seen with Citi’s foreign subsidiaries of late has been in preparation for sale or nationalization. I expect this to be the big news when markets open tomorrow. Note: this will mean massive dilution for shareholders, so it is unclear how the markets will react to the news. I will update this post as information becomes available.

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup’s common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world’s largest financial institutions. The proposal was made by Citigroup to its regulators. The Obama administration hasn’t indicated if it supports the plan, according to people with knowledge of the talks.

The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup’s share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn’t cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted.

The talks thus far have occurred largely between Citigroup and its regulators, the Federal Reserve Board and the Office of the Comptroller of the Currency, to clear the way for the plan to later go to the Obama administration.

A larger ownership stake by the federal government also likely would fuel speculation that other troubled banks will line up for similar agreements.

Bank of America Corp. said Sunday that it isn’t discussing a larger ownership stake for the government. “There are no talks right now over that issue,” said Bank of America spokesman Robert Stickler. “We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it.”

Citigroup’s low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake in the bank could backfire, potentially spurring investors to flee other banks, even healthier ones.

There’s no universal agreement on what constitutes nationalization of a bank. In the U.K., the government already owns 43% of Lloyds Banking Group PLC, and last week it moved to increase its ownership of Royal Bank of Scotland Group PLC to 70% from 58%. Those two banks have been classified as “public-sector entities,” and as much as £1.5 trillion ($2.136 trillion) of their liabilities have been moved over to the country’s balance sheet.

The White House has knocked down recent speculation that the government is preparing to nationalize several large U.S. banks.

The U.S.’s intentions with Citigroup remain unclear. For instance, it’s not yet known whether the government would seek a stronger hand in the New York’s company’s management or day-to-day operations.

As part of the plan, Citigroup officials hope to persuade private investors that have bought preferred shares — such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority — to follow the government’s lead in converting some of those stakes into common stock, according to people familiar with the matter. That would further bolster an obscure but increasingly pivotal gauge of banks’ capital known as “tangible common equity,” or TCE.

The highly complex TCE measurement, one of several gauges of a bank’s financial strength, gives weight to common shares — thus the interest in converting perferred shares to common stock.

Details of the rescue remain in flux. Key questions, such as the price at which the government will convert its preferred stock into common shares, haven’t been resolved.

And it’s possible that other options will emerge to stabilize the company. For example, the Obama administration could decide to sit tight until the results of several new “stress tests” on major banks — broad exams of their financial health now being mandated — are known in a couple months, one official said.

Citigroup Chief Executive Vikram Pandit huddled Sunday with his senior executives to fine-tune its pitch to the Obama administration.

Citi must be desperate because this plan is very unrealistic; the Obama team wants nothing to do with pumping more money into large banks like Citi. In the article, Citi mentions Abu Dhabi as a potential white knight. If you read my recent post on Abu Dhabi, you would know that the United Arab Emirates have problems of their own.

You should also notice that Bank of America has said it is not pursuing the same type of negotiations. They know that the markets would eat them for lunch if they did.

In my view, Citigroup has just put itself in play, meaning it must either get a huge government stake, be nationalized or file for bankruptcy. It’s life as an independent company is over.

See the link at the bottom for the rest of is article.

Also see the video below for Bloomberg coverage of the Citi negotiation.

U.S. Eyes Large Stake in Citi – WSJ

  1. Anonymous says

    “Note: this will mean massive dilution for shareholders, so it is unclear how the markets will react to the news.”

    C up +39.5% in Japan.

  2. Basel Too says

    I appreciate your work, but you are clearly erroneous on two points.

    this will mean massive dilution for shareholders
    If the market is pricing C for insolvency, then a conversion from preferred to common will actually help common, since it’s a move down the capital structure. Common is now on par with the US Government.

    file for bankruptcy
    Repeat after me: BANKS CAN NOT FILE FOR BANKRUPTCY! They are strictly excluded from the Bankruptcy Code.

  3. ALAN says


Comments are closed.

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