Citi Seeking More Federal Aid
Monday, February 23, 2009
Citigroup executives have approached federal regulators to discuss steps the government could take to strengthen the troubled company, according to two people familiar with the matter.
The giant New York bank is under mounting pressure to convince investors that it can survive its financial problems. The government already has invested $45 billion in Citigroup and promised to limit its losses on a portfolio of more than $300 billion of loans and other troubled assets. But investors remain nonplussed, and the company's stock price has dropped 71 percent this year.
A new round of government help would not necessarily require more public money. One possibility that some bank executives and economists have urged officials to consider is changing the terms of the government's existing investments in Citigroup and other banks.
The government required banks to issue it preferred shares that pay interest and carry other features designed to encourage repayment after a few years. The executives and economists now want the government instead to accept shares of common stock.
The change would benefit the companies by eliminating the dividend payments and the pressure to repay the total investment. The change also would create an accounting benefit for the companies that is highly technical but nevertheless consequential: It would significantly improve the banks' performance on a measure used by financial analysts called tangible common equity, which basically judges a bank's reserves against future losses.
Most of all, while such a change would dilute the value of existing common shares, it might buoy the company by persuading more people to invest alongside the government.
The conversion to common shares would increase the government's ownership stake. But it would not necessarily increase the government's control, because regulators already have taken a role in decision-making at Citigroup.
Such a change, however, could also affect the terms of the government's next round of investments in troubled banks.
The government plans this week to announce details of "stress tests" that it will conduct on the largest banks, including Citigroup, to determine their resilience against the economic downturn. The government will use the results to determine the extent of additional public investments in the banks.