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US Government May Take Bigger Stake in Citi

Posted on 23 Feb 2009

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U.S. officials are talking with Citigroup about the federal government taking a larger stake in the troubled institution, according to people familiar with the situation.

The aid would involve a new capital injection that would increase the government's stake in the troubled bank, but would not constitute nationalization, which has been a major concern for investors.

Sources say bank executives are hoping the government stake will top out at about 25 percent, athough it is possible it could be as high as 40 percent. In either case, if the government converts its current preferred-stock status to common shares, Citi shareholders would see their stakes diluted and the government would potentially have a much larger influence over Citi.

Treasury spokesman Isaac Baker said: "We don’t comment on conversations with specific banks. However, as part of the Financial Stability Plan announced two weeks ago, financial institutions can apply to convert their existing preferred stock into a new convertible preferred stock, which can be exchanged into common equity shares at the option of the company as needed to strengthen their capital structure. We are open to considering a request to do so if the institution and it’s regulator believe it would promote the long term stability of that institution, and if we believe it’s in the best interest of long term stability of our economy and financial system."

"Citi's capital base is very strong and our Tier 1 capital ratio as measured at the end of the fourth quarter was 11.9%, among the highest in the industry," Citi said in a statement issued Sunday night. "We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth."

Comparing Citigroup's market capitalization with the number of preferred shares the government currently owns, if these shares were converted right now to common stock, they would worth more than 100 percent of Citi's total market capitalization.

Any additional money that Citi receives from the government automatically means a further stock dilution. While Obama Administration officials say this isn't nationalization, markets may interpret the situation differently and see it as de facto nationalization.

The move likely would make the U.S. government the biggest shareholder of Citigroup, owning a majority of its stock. This is de facto government ownership, or nationalization. What this ownership means at this point, nobody knows.