Private Investment Required In U.S. Deal With Citigroup
Saturday, February 28, 2009
The government's deal to take a large ownership stake in Citigroup offers a preview of the coming round of public investments in troubled banks, including the demand that Citigroup secure a matching investment from the private sector.
The government will own up to 36 percent of Citigroup's common shares under the terms of the deal announced yesterday, which is designed to reassure investors that the troubled New York bank can survive the deepening recession.
The deal does not involve new funding from taxpayers. The Treasury Department already has invested $45 billion in Citigroup. The company may repay up to $25 billion with common shares rather than cash. The government will surrender billions of dollars in dividend payments on its original investment, but taxpayers will benefit directly if the company's share price recovers in the wake of the federal aid.
A key condition is that Citigroup must also convince investors to accept its common shares. The company must place $27.5 billion in shares with private investors in order to place the maximum of $25 billion with the government. If the company succeeds in full, its current shareholders will be left with roughly a 26 percent stake.
Inducing private investment is a priority for the government as it moves to shore up other large, troubled banks, officials said. 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.
Citigroup chief executive Vikram Pandit, who pushed for the deal, will remain in his position. But Citigroup bowed to government pressure to overhaul its board of directors by appointing a majority with no direct ties to the company. Citigroup will replace five of its 15 directors.
This is the third round of government help for Citigroup. In October, the 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. Those steps did not comfort investors, who have come to doubt whether the most international of U.S. banks can withstand a global recession.
The new deal basically tweaks the terms of the earlier investments, allowing Citigroup to count the government's money as part of its core reserve against losses.
Citigroup's reserve is now considerably larger than those of many rival banks. Executives believe that the government's stress test is likely to show that the company does not need more capital, according to a person familiar with the matter.
But Citigroup has more problems than its rivals, including an unusually large collection of troubled loans and other assets that have lost big chunks of value. As a result, company executives -- like much of the industry -- are waiting eagerly for additional details on Treasury Secretary Timothy F. Geithner's plan to purchase troubled assets from banks.
Citigroup shares dropped 96 cents yesterday to close at $1.50, down 39 percent.
Staff writer David Cho contributed to this story.