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Source: Reuters -
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Citigroup Inc is in talks to give the US government a larger stake, a person familiar with the matter said, providing Washington with a far greater say in the affairs of the ailing banking giant.
Taxpayers could end up owning as much as 40% of Citigroup's common stock, though executives at the third-largest US bank by assets hope to limit the stake to about 25%, The Wall Street Journal said on Monday, citing people familiar with the situation.
The talks could lead to the government converting a substantial portion of its $US45 billion in Citigroup preferred shares, equal to a 7.8% stake, into common stock, diluting existing shareholders, the newspaper said. The government took that stake when it bailed out the bank last year.
"It can be taken as a commitment that some banks are too big to fail and the economic consequences too bad to contemplate," said Tony Morriss, senior markets strategist at ANZ Investment Bank, in Sydney.
Citigroup shares rose US$0.33, or 16.9%, to $US2.28 in early trading after US bank regulators said they stood ready to provide more capital to the banking sector and "preserve the viability of systemically important financial institutions".
If the government took a large common equity stake in Citigroup, the move would stop short of a full nationalisation that wipes out shareholder equity. But such a move could be the functional equivalent of nationalisation, even if the government lacked voting control.
"The government doesn't want to do this," said Art Hogan, chief market analyst at Jefferies & Co in Boston. "This is government looking into Citigroup, saying what is the best way to keep the banks alive, not the stocks alive. That's the important part."
The White House has said President Barack Obama favours a privately-held banking system.
Moreover, Treasury Secretary Timothy Geithner's bank stabilisation plan allows lenders to apply to convert preferred shares into convertible preferred shares and later into common equity to bolster capital, a spokesman said.
Nationalisation trap
In the coming weeks, the Treasury Department is expected to subject banks with more than $US100 billion of assets to "stress tests" to decide which need capital. Citigroup ended 2008 with $US1.95 trillion of assets.
Governments worldwide are moving to prop up ailing banks. Britain, for example, has taken a majority stake in Royal Bank of Scotland Group Plc.
A larger government stake in New York-based Citigroup could fuel speculation that Bank of America Corp and other lenders might need similar agreements. If that happened, shares of other lenders could fall, including relatively healthy ones.
"Nationalisation is a trap that the US government should avoid," Fox-Pitt Kelton analyst David Trone wrote. "If Citi is nationalised, all bank stocks are likely to get crushed in fear."
In early trading, Bank of America rose 14.5% to $US4.34, JPMorgan Chase & Co rose 6.4% to $US21.18, and Wells Fargo & Co rose 6.8% to $US11.65. The Standard & Poor's 500 rose 1%, and US Treasury prices fell.
Stress tests ahead
Vikram Pandit, Citigroup's chief executive, has tried to stabilise the bank by dividing it in two, creating Citicorp to house healthier businesses the bank wants to keep, and Citi Holdings to house businesses it hopes to sell or wind down.
The bank has lost $US28.5 billion in the 15 months ended December 31, 2008, and analysts expect losses in 2009 and 2010.
Citigroup in October and November issued $US52 billion of preferred shares to the government, of which $US45 billion was considered capital and $US7 billion a fee for the US agreeing to share losses on $US301 billion of troubled assets.
Converting the preferred stock to common stock is one of many options for the government, the person who spoke with Reuters said.
Citigroup declined to comment on the reported talks with the government, but in an email said its capital base is very strong, with Tier-1 capital, which measures its ability to cover losses, about twice the required minimum.
On the other hand, Citigroup and many rivals come up short of what analysts prefer in another measure of capital - the ratio of tangible common equity to tangible assets.
If the government converted $US45 billion of preferred shares into common stock, Citigroup's tangible common equity ratio would rise to about 3.9% of tangible assets from its current 1.5%. Tangible common equity is a measure of how much common equity a bank has to cushion itself through difficult times, when intangible assets like goodwill may have to be written down.
There is no market consensus regarding how much tangible common equity a bank should have. Some investors believe it should be more than 5%, while other believe it should be more than 7%. But there is wide consensus that current levels at major banks are too low, signaling that banks don't have enough resources to carry themselves through difficult times.
Big investors
Citigroup began raising capital aggressively in late 2007, including from Abu Dhabi Investment Authority, Kuwait Investment Authority and Singapore Investment Corp. Saudi Prince Alwaleed bin Talal, the bank's largest individual shareholder, also boosted his stake.
Singapore declined to comment. The others were not immediately available for comment.
Converting Citigroup preferred shares would add pressure on Bank of America, which also received $US45 billion from the government and a loss-sharing pact on $US118 billion of assets. About three-fourths of those assets came from the former Merrill Lynch & Co, which Bank of America bought on January 1.
Bank of America spokesman Robert Stickler said the largest US bank is not in, and does not expect to enter, talks about new capital or converting preferred stock to common stock.
"We are in very healthy shape, we have strong capital, we have the strongest liquidity in the industry, we are profitable and we are lending across business lines," he said.
