WASHINGTON (AP) - The government is on the verge of closing a
deal to significantly boost its ownership stake in Citigroup. In
return, it will demand changes be made on the troubled banking
giant's board and other conditions, according to a person with
knowledge of the discussions.
The increased stake in Citigroup Inc. will not require
additional money from taxpayers and the bank will still have to
undergo a "stress test," such as those that banking regulators
started conducting this week on the nation's biggest banks, said
the source, who spoke on condition of anonymity because a deal
hasn't been officially announced.
An announcement is anticipated later Friday.
The government would convert some of its preferred shares in
Citigroup to common shares only if the bank can get private
investors to do the same, the source said. If that were to happen,
the government's stake in Citigroup could jump to 40 percent, from
less than 8 percent now, the source said.
The New York-based bank already has received $45 billion in U.S.
bailout money made up primarily of debt-like preferred shares, and
it has received federal guarantees to cover losses on some $300
billion in risky investments.
Converting the shares of preferred to common stock would help
bring Citigroup closer to the mix of capital that the government
will want to see when it conducts the stress tests.
The stock-conversion option was laid out by the Obama
administration earlier this week as an option for providing relief
to banks. It gives the government greater flexibility in dealing
with ailing banks. It also gives the government voting shares, and
therefore more say in a bank's operations.
But common shares absorb losses before preferred shares do,
which means taxpayers would be on the hook if banks keep writing
down billions of dollars' worth of rotten assets, such as dodgy
mortgages, as many analysts expect they will.
On the other hand, common stock in banks is incredibly cheap,
and taxpayers would reap gains if the banks come back to health and
the stock price goes up.
Citigroup has not been the only financial institution to be
clobbered by the collapse of the housing market, which sent home
prices tanking, home foreclosure soaring and financial companies
racking up multibillion dollar losses in soured mortgage
Last year, Bear Stearns Cos. collapsed, Lehman Brothers Holdings
Inc. went bankrupt, and American International Group Inc., Fannie
Mae and Freddie Mac got bailed out and taken over by the
government. As an insurer of the toxic assets plaguing the credit
markets, AIG has hemorrhaged far more money than Citigroup.
The first two months of 2009 have seen Citi shares slide another
64 percent, giving the bank a market cap below $14 billion, a far
cry from the more than $100 billion market cap it held a year ago.