Citigroup wants U.S. to take a bigger stake, report says
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Citigroup wants the federal government to convert its investment in the bank to common shares, a move that would make Uncle Sam the largest single shareholder, the Wall Street Journal’s website is reporting.
That would constitute at least partial nationalization of the bank -- although one can argue Citi already has been effectively nationalized, given the level of federal aid it has received.
From the Journal:
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. 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 government’s stake could rise as high as 40%, the Journal said. . . .
Why convert the preferred stake to common shares? Under accounting rules, that would boost Citi’s ‘tangible common equity,’ the first line of defense against rising loan losses.
But such a move also would confirm other shareholders’ worst fears -- that their ownership stake in the bank is wasting away, while the government’s stake, and control over the company, rise.
Bank stocks plunged again last week on mounting concern that the government would have to nationalize some large chunk of the industry as loan losses surge. So some significant amount of bad news already is discounted in current bank share prices. Citi ended Friday at $1.95 a share.
The Journal says the Obama administration hasn’t indicated whether it would support Citi’s idea. The Treasury has previously said it would soon begin ‘stress testing’ major banks for their ability to survive rising loan losses. It was expected that those tests would force some banks to raise their capital cushions.
All of which makes the Citi idea sound like it could be a trial balloon -- awaiting the markets’ verdict on Monday.
-- Tom Petruno