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U.S. government to boost its stake in Citigroup

Treasury Department would convert up to $25 billion in preferred stock into common stock. The move would require Citigroup to revamp its board of directors but would not cost additional federal funds.

February 28, 2009|Jim Puzzanghera

WASHINGTON — In agreeing to become the biggest owner of Citigroup Inc.'s common stock, the government is moving as close as it has come in 25 years to nationalizing a major bank, demonstrating a continued willingness to act aggressively to address the financial crisis.

"I think it underlines what they've already been saying," said Douglas J. Elliott, an economics fellow at the Brookings Institution and a former investment banker. "One, they're going to make sure these banks are not going to go under. And two, they really want to avoid nationalization."

Still, the federal government is likely to have a direct ownership stake of 36% in one of the country's largest banks after converting as much as $25 billion of its $50 billion in Citigroup preferred stock into common shares.

Under the deal, the federal government would provide no additional money to Citigroup. But the stock conversion would improve the company's balance sheet, helping the bank weather the recession and cope with the billions of dollars in toxic assets on its books.

"In the end, our business is about confidence," Chief Executive Vikram Pandit told analysts and investors Friday. "We wanted to take definitive steps to put all capital issues aside."

Pandit is keeping his job, Citigroup said, but the company told the government that it would overhaul its board of directors.

The CEO dismissed suggestions that the higher U.S. stake meant the bank now was essentially nationalized.

"We completely remain in charge of the day-to-day operations of the company, and none of that changes," Pandit said. "We're going to run Citi for the shareholders."

Those existing shareholders, whose stake would be slashed to as little as 26% under the deal, delivered a vote of no confidence in it, pushing the company's stock price down 96 cents to $1.50.

The 1.8 billion shares traded set a New York Stock Exchange record, topping a mark set by WorldCom Inc. in 2002 amid its accounting scandal.

The government now would have a large, long-term stake in a major bank for the first time since the U.S. took control of failed Continental Illinois in 1984, Elliott said. It took seven years for the government to divest itself of its 80% stake in that bank, which was much smaller than Citigroup, he said.

"If we were stuck with Continental Illinois for seven years in a bull market . . . imagine what it would take for us to back out of Citigroup," he said. "I think we're going to own a substantial portion of Citigroup for years."

Independent bank analyst Bert Ely said it was unclear how much further the Obama administration would go to keep Citigroup from failing. The bank's woes became clearer Friday, as it reported that its net loss last year had increased to $27.7 billion, 48% larger than it estimated six weeks ago.

"We've got a big, sick whale, and the question is, how do we get it back to health?" Ely said. "We've never had anything like this."

Federal officials, who reiterated this week that they did not intend to nationalize banks, said Friday that they acted at Citigroup's request. The deal is contingent on Citigroup's reaching a similar conversion agreement with other preferred shareholders.

The Treasury Department would convert its preferred shares, acquired with money from the $700-billion financial rescue fund, to match the amount other shareholders converted, up to $25 billion, at the best terms obtained by other shareholders.

Citigroup said it had commitments from most of its large, private preferred shareholders, including the Government of Singapore Investment Corp. and Prince Alwaleed bin Talal of Saudi Arabia.

Citigroup said it would convert the preferred into common at a price of $3.25 per common share, representing a 32% premium over the closing price Thursday of $2.46. That premium over market value grew to 117% with Friday's plunge in the stock.

Rep. Brad Sherman (D-Sherman Oaks) blasted the accord. "The only thing worse than nationalizing a bank is to pay for the entire bank and only get a third of it," he said.

The deal boosts the government's risk -- because preferred shares are much more likely to retain value in a bankruptcy than common shares -- but increases the potential upside for taxpayers if Citigroup recovers.

The private preferred shareholders have little choice but to go along with the conversion because under the deal, Citigroup is suspending dividends on their stock, removing the key reason for owning it.


Times staff writer Walter Hamilton in New York contributed to this report.

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