In Stock Deal, U.S. Plans to Enlarge Stake in Citigroup
Friday, February 27, 2009
The federal government plans to take a substantial ownership stake in Citigroup, launching the Obama administration's new strategy to prevent the failure of any more large banks, according to sources familiar with the matter.
The deal, which the sources said was still being negotiated last night, is designed to reassure investors that Citigroup has the resources needed to survive the recession by increasing the company's reserves against future losses.
The deal would not involve new money from taxpayers. The government already has invested $45 billion in the troubled New York bank. Citigroup now will be allowed to repay up to $25 billion by issuing the government shares of its common stock, which carry ownership rights. The government could end up owning about a third of the company, said the sources, who spoke on condition of anonymity because the talks were ongoing.
A key feature of the deal is that Citigroup must find private investors to match the public support. The government will accept common shares equal to the amount accepted by those investors, up to a limit of $25 billion, on a one-for-one basis.
Under the plan, the government would forgo billions of dollars in dividend payments that Citigroup was required to make on the existing investments, which paid annual interest of 5 percent. However, taxpayers would benefit if Citigroup's shares rise in value.
Citigroup's chief executive, Vikram Pandit, who pushed for the deal, will remain, the sources said. The government has already directed Citigroup to overhaul its board of directors by appointing more people with no ties to the company.
The terms, particularly the requirement that the company find investors to match the government's support, create a template for a forthcoming round of investments in other troubled banks. Federal regulators launched stress tests this week on 19 large banks to determine how much additional money they need to survive the next two years. The results are expected by the end of April, if not sooner.
This is the third round of government help for Citigroup. In October, Treasury invested $25 billion in the company. In November, Citigroup got another $20 billion plus a government guarantee to limit its losses on a portfolio of more than $300 billion of troubled loans and other assets.
The steps did not comfort investors, who have come to doubt whether the most international of U.S. banks can withstand a global recession. Citigroup's shares have lost 90 percent of their value in the last year, closing at $2.48 in trading yesterday on the New York Stock Exchange.
One apparent reason: Many investors concluded that the government money did not count as part of Citigroup's capital reserve against future losses, because the investment looked like a loan. The company was required to issue the government shares of preferred stock, which carried an interest rate that spiked after five years to encourage repayment.
By allowing Citigroup to issue common shares to replace those preferred shares, the government hopes to convince investors that the company has a sufficient capital reserve to survive its problems.